Buying Selling or leasing a Car

Buying, Selling or Leasing a Car
This section is provided to assist clients in making informed financial decisions when buying, selling or leasing vehicles. Being knowledgeable before shopping can help save those hard-earned dollars. This page is organized in logical steps to help you prepare yourself.
Step 1 : Determine Trade-in Values -
Use this link to determine the trade-in value of your vehicle. The valuation will take into consideration the make, model, year, mileage, condition and vehicle amenities.
Step 2 : Determine Affordability -
Based on your down payment (if any), trade-in (if any), current interest rates, and the amount you can afford monthly, this automobile affordability calculator will determine what purchase price you can afford. With this information, proceed to the new or used car values to select a vehicle within your price range.
Step 3 (A) : New Car Values
se this link to determine the suggested resale price of a planned new car purchase.
Step 4 : See if any of the special considerations below apply to you.
Considering a Lease? If you are considering a lease rather than purchasing a vehicle, our calculator can assist you in evaluating whether it is better to lease or buy.
Financing the Vehicle? Please review our article on the deductibility of vehicle interest.
Will the Interest on Your Vehicle Loan be Deductible?
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The answer to that question depends upon whether or not the vehicle is being used for business purposes, where the expenses are being deducted, and the type of loan. If the loan is a consumer loan secured by the vehicle, then the following rules would apply:
  • If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule then the business portion of the interest will be deductible as business interest, but the personal portion will not.

  • If the vehicle is being used partially for business as an employee and the expenses are being deducted as an itemized deduction, then neither the business portion nor the personal portion of the interest will be deductible.

  • If the vehicle is entirely for personal use, then none of the interest will be deductible, because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest.
As an alternative to a nondeductible consumer loan, you might consider acquiring that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will make the interest deductible.
 
Before borrowing against the home, you should consider the following:
  • Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.

  • When buying a car, you can sometimes get very favorable interest rates or a rebate. To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount.

  • It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.

  • If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt. If you need assistance in deciding on a course of action, please call our office.
Using the Vehicle for Business? Please review our article on luxury auto limits and the options available for deducting automobile expenses.
 
Deducting Auto Expenses & Luxury Auto Limits
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When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses on your business. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways, the standard mileage rate method or the actual expense method.
 
Standard Mileage Rate Method:
The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. For 2006, the standard mileage rate is 44.5 cents per mile. In addition the cost of business-related parking and tolls is deductible. Caution: If you don't use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years. If in a subsequent year you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.
 
Actual Expenses Method:

To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. How ever, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a "luxury vehicle," regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a "luxury vehicle."

The depreciation deduction for luxury vehicles has an annual limit which generally changes for each tax year. For vehicles placed in service during 2005, the first-year limit is $2,960, the second year is $4,700, the third year is $2,850 and for all subsequent years, the limit is $1,675. The limits for 2006 had not been released at the time this article was posted, but will be very similar to the 2005 values. 2004 is the last year that the bonus depreciation is available. Therefore, for years 2005 and after, only the lower limit will be available.

In an effort to reign in the practice of purchasing SUVs as a tax shelter, Congress has placed limit of $25,000 on the §179 deduction for certain vehicles. The limit, effective for purchases after October 22, 2004, applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver's seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

Purchasing or Purchased a Hybrid Vehicle? If so, you are entitled to a substantial tax deduction.
 
Tax Benefits for Fuel-Efficient Vehicles
With gas prices going through the roof maybe now is the time to take advantage of the energy tax incentives available for the purchase of hybrid vehicles. If you purchased and placed into service a certified hybrid vehicle during 2005, you are entitled to a deduction equal to 100% of the purchase price (limited to a maximum deduction of $2,000). You are not required to use the vehicle for business to receive the deduction and it is an above-the-line deduction, which means you don't need to itemize your deductions to take advantage of it. If you used the vehicle for business, you can include the business use portion of that deduction in your business expenses. Bottom line: if you are in the 25% tax bracket, you save as much as $500 in taxes!
 
If you purchase a hybrid vehicle in 2006 you receive a tax credit that is made up of two separate credits;
  • The increased fuel economy credit, ranging from $400 to $2,400, and
  • The lifetime fuel savings credit, ranging from $250 to $1,000.
Since these are tax credits, they directly offset your regular income tax provided you are not taxed by the Alternative Minimum Tax (AMT). Unfortunately, under the law taking effect in 2006, the credit cannot be used to offset AMT. In addition, each manufacturer is limited to producing 60,000 vehicles on which these credits are available. Thus, before you sign on the dotted line, you need to:
  • Make sure you are not in the AMT and can benefit from the credit,
  • Verify the amount of credit available for the vehicle you are purchasing, and
  • Make sure the credit is not limited because the manufacturer has exceeded the 60,000 car limit.
Additionally, you should evaluate whether the extra cost usually commanded for hybrid vehicles can be recouped by a combination of the tax benefit and anticipated fuel cost savings over the period you expect to drive the vehicle.
 
Standard Mileage Tax Strategy -
If you use a vehicle for business, you have the option of deducting the actual expenses including fuel, repairs, insurance, etc., or deducting a standard amount for each business mile driven. The standard mileage rate is determined periodically by the IRS using average costs of operating a vehicle. With the increase in fuel costs, the IRS has raised the business mileage rate to 48.5 cents per mile. By using the standard mileage rate with a high fuel-efficient vehicle, it is conceivable that you could deduct more than the actual cost of operating the vehicle
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