Feb 4, 2009

Warning! The following post may contain material that causes drowsiness. Do not drive or operate machinery while reading. The latest and greatest from the Stimulus Bill includes a tax deduction for buying a new car. I like to think of it as another dopey idea for people who can't do math. This provision allows a tax deduction for the sales tax on the purchase of the vehicle and another deduction for the interest paid on a loan to finance it. Suppose that you buy a car for $25,000 bucks. Here in Hooterville, where the sales tax rate is 8.1%, you would pay $2,025 in sales tax. That translates into a one-time income tax savings of about $300, if you are in the 15% marginal rate or about $500 if you are in the 25% bracket. If you were to finance the new car, you would also get to deduct the interest you paid on the loan. The interest on a $25K loan over 5 years is about $4,000 at a 6% interest rate. It breaks down like this. Year 1 - $1300 - tax savings $195 (15% rate) or $325 (25% rate) Year 2 - $1100 - tax savings $165 (15% rate) or $275 (25% rate) Year 3 - $ 900 - tax savings $135 (15% rate) or $225 (25% rate) Year 4 - $ 600 - tax savings $ 90 (15% rate) or $150 (25% rate) Year 5 - $ 100 - tax savings $ 15 (15% rate) or $ 25 (25% rate) Total saving on income taxes over 5 years is between $900 and $1500, or $180 to $300 per year. So the question is, should you go deeply in debt to buy a depreciating asset in order to get $25 per month from the government? Things in this blog represented to be fact, may or may not actually be true. The writer is frequently wrong, sometimes just full of it, but always judgmental and cranky

9 comments:

Barbara said...

I think you are always better off taking public transportation, where it exists. Unfortunately I am not reached easily by bus or Metro, so I am stuck driving.

Megan said...

I trust the numbers of Sneed.

tut-tut said...

Ha! keep your old beater if you can, I say.

Coffee Messiah said...

Wow is all I can say.

Anyone who will spend $15,000.00 or more to save a few sawbucks, well, I won't say.

Keep us informed if you hear from the pres.

Don't feel bad, I make so little, but owe despite it too ; (

Kurt said...

Click and Clack nailed it years ago: a used car is always the better deal.

bella rum said...

I love it when you crunch numbers.

e said...

Right again, Mr. Sneed! And I agree with Click and Clack about the used car, too. Send this to Obama and let us know if he writes back!

Erika said...

No, you shouldn't. But I'm sure some will.

Reya Mellicker said...

I don't feel drowsy, but my eyes crossed, trying to understand the rationale behind this.

Yikes. Thank God we have you to explain this to us. and Thank God I don't own or need a car.