Vehicle Purchase Tips:

Make Those Deductions Work for You!

The purchase of a new vehicle has tax ramifications that should be considered, regardless of its use.

If the vehicle is financed with a consumer loan, then none of the interest will be deductible as an itemized deduction. However, if a self-employed individual is making the purchase and some portion of the vehicle is used for business, then the portion of the consumer interest attributable to the business use is deductible on his or her business schedule. Some vehicle manufacturers offer low-interest consumer loans, which may provide a better financial result than a tax deduction. If you are considering using home equity debt, keep in mind that the interest to the extent the equity borrowing does exceed $100,000 would be deductible as home mortgage interest, but is not deductible to the extent that the individual is taxed by the alternative minimum tax (AMT). Before utilizing the home equity option, taxpayers are cautioned to discuss it first with their financial advisor, since it may not always be advisable.

Taxpayers who itemize deductions are allowed to deduct the greater of the state income tax or state and local general sales tax paid during the year. The sales tax deduction is the greater of (1) actual state and local sales tax paid based on receipts or (2) an income-based amount from an IRS-created table, plus the sales tax on certain major non-business purchases (including vehicles). Currently, the law allowing sales tax to be deducted is scheduled to expire after 2007. It might make sense to accelerate the purchase into 2007 to be able to deduct the sales tax on the car’s purchase. This strategy does not apply to the extent that the individual is taxed by the AMT.

With the high price of gasoline, a fuel-efficient hybrid may be a wise option. Certain hybrids provide a substantial tax credit that ranges from $250 to $3,400, depending on vehicle efficiency. If the vehicle is purchased for personal use, the credit will reduce the regular tax to zero, but any excess credit is lost. However, to the extent that the individual is subject to the alternative minimum tax (AMT), the credit provides no benefit at all. On the other hand, if some portion of the vehicle is used for business, then the credit is allocated between the personal credit and a general business credit. Unlike the personal portion of the credit, the general business credit does offset the AMT, and any unused portion can be carried to other tax years. In many cases, the tax write-off for high-gas-mileage hybrids used for business will exceed the actual cost of operating the vehicle, when the standard mileage rate method is used to figure the tax deduction.

For those individuals who are purchasing a heavy SUV for business purposes to take advantage of the large first-year deduction of $25,000, at press time, Congress was considering eliminating that benefit after 2007.

Please give this office a call if you are planning a vehicle purchase and would like to discuss your options.

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