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Senate approves tax break for new car shoppers
The economic stimulus bill just got a whole lot more interesting for automakers and car buyers alike, as a proposal to make interest on auto loans deductible has been voted in. The proposal, which was championed by the National Automotive Dealer Association, was voted in by a bi-partisan 71-36 vote. If the $800 billion stimulus bill passes the Senate and this provision survives, car buyers will be able to write off auto loan interest on their taxes, saving about $1,500 on a $25,000 car purchase. The new legislation will mark the first time since 1986 that car buyers will be able to write off their car loan interest. It's likely that automakers will shy away from 0% financing in the future and offer more cash rebates for slow-selling models (read, all models) so customers can maximize their savings.
Lawmakers and NADA are hoping the provision will help generate interest in new car purchases, but some detractors feel more should be done up front to encourage car-buying. That may be true, but after looking at January's sales figures, we're guessing that automakers aren't going to look a gift horse in the mouth.
[Source: Automotive News, sub. req'd]
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Reader Comments (Page 1 of 3)
Swede 7:39AM (2/04/2009)
I'd add prerequisites about fuel efficiency to that and Bob's yer uncle.
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jg 10:48AM (2/04/2009)
The tax break should only apply to alt fuel vehicles. You want an oil burner you pay for it yourself. I'm ok with tax breaks that encourage people to buy but they need to do what's in the best interest of the country not the Big 3.
At least they finally are targted tax breaks at the lower 95% of the population.
Supply side economics is a scam.
Toledo Guy 12:43PM (2/04/2009)
Guess JG better change his icon, 'cuz he won't be buying a BMW anytime soon then.....
steve 7:41AM (2/04/2009)
Sounds great, but is there an income limit that will phase some people out of the credit?
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notYou 10:17AM (2/04/2009)
Steve: "Sounds great, but is there an income limit that will phase some people out of the credit?"
Hopefully not, the only people who are paying taxes any longer are the ones whose income is at a level you'd probably rather not see allowed to keep their own money, err, get a "tax break".
Unless you're hoping that those who pay little or no any taxes would get a tax-rebate consisting of other people's money. Whoops, I think I let your cat out of the bag...
jg 10:44AM (2/04/2009)
'Hopefully not, the only people who are paying taxes any longer are the ones whose income is at a level you'd probably rather not see allowed to keep their own money, err, get a "tax break".'
What? That sentence makes no sense.
Dan 12:45PM (2/04/2009)
You bet there is, it's coming from a democrat after all. You make over $125K, you get zilch.
Just another subsidy from people who pay taxes to people who don't.
notYou 12:57PM (2/04/2009)
jg: "What? That sentence makes no sense."
"tax break" is a popular euphemism for "letting people keep their own money".
In 2007, only 138 or ~330 million people in the US paid taxes (that's 41% of citizens). Of those 138m, the bottom 50% (@ 30k'ish) pay virtually nothing net because of refunds/rebates and other political-tax-shenanigans. So it's the top 70m (that 21% from 330m) who are paying anything at all. Steve would probably call these baskets of money - err, taxpayers - "rich".
Steve's point was that the "tax break" should be phased out as incomes get higher (translation: the producers - err, "rich" - shouldn't get the break).
Soooo, since Steve didn't cite an exact phase-out floor but wants to make sure "higher" incomes don't receive any benefit (again "allowed to keep their own money") my point was they are the only ones who _should_ be getting the benefit, essentially because they're the ones _paying_ for it.
Hope that clears it up, but you have to untangle your mind from the popular left-wing mindset that a "tax break" is anything other than letting people keep what they own.
Jared 11:55AM (2/05/2009)
Left wing idiots.... All they are trying to do is encourage the poor to stay poor by paying for everything for them. All those idiots asking for tax breaks, government checks, unemployment pay, etc. Just want other people to pay for them to live lazy. But what ever...
I just want to know... If you get a high interest loan; and you are able to write that interest off on your taxes, then wouldn't a high interest loan almost lower your taxes in a sense? Because if you have a high interest, then you are just writing more $$ off your taxes... although u are also paying more money...
Anthony 7:59AM (2/04/2009)
Well late last year I tried to buy a Caliber SRT-4 and it didn't go well. The main quibble was I didn't make enough. That's not under my control, I had to drop down to part-time status but I haven't miss a car payment EVER.
This loan is a perfect 100% on time rate.
Its boosted my score about 30 points since but I'm still just below 650 on my FICO score average.
If they can stop saying I don't make enough when the loan I wanted was more than feasible in regular credit markets, that just shows what really needs to happen first is unlocking the credit market, despite what the CEO of JP Morgan-Chase says.
So really until the credit market open up, these provision will only help those with scores above 700 and honestly if they wanted a car and didn't have a high debt to income ratio to match, they had no problem getting a loan.
I on the other hand might have to wait until my current car is paid off to get another 10 or so point boost for my FICO score average and by then the credit markets might return to normal (2011)....
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Gray Smith 8:03AM (2/04/2009)
I agree with you there...though I'm on the other end, my credit is shot due a nasty divorce, but I can easily afford a cheaper new car (versa, fit). Dealerships also need to be nicer to people who come in to look...
JZeke 10:36AM (2/04/2009)
I hear you both.
A quote from John C. Hope III, the chairman of the Whitney National Bank in New Orleans:
“Make more loans? We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.”
Lenders are sitting on their TARP funds to keep their doors open worry-free. Until there is a federal action demanding lenders to reassess their loan application practices (perhaps with some form of insurance from the treasury on each new loan issued?) no one with even slightly tarnished FICO scores will be able to get even moderate loans.
Sad because there are a good deal of buyers out there (myself included) who are actually working, have well above average salaries, saving and have minimal to zero debt - but imperfect FICO scores.
ambientFLIER 1:07PM (2/04/2009)
Eh, they saved you from a headache anyway :P The caliber is crap.
Anthony Gentavoe 8:16AM (2/04/2009)
I am not an accountant, I hire "people" for that, but if new car buyers are able to write off auto loan interest, doesn't this mean that the amount they paid in interest will reduce their taxable income by that amount. In other words, in the example above, if they reduce their taxable income by the $1500 they paid in interest, at a 30% tax bracket, they would have only really "saved" $450, not the entire $1500.
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Throwback 8:26AM (2/04/2009)
The answer is yes. This used to be the law up until about the mid 80's. My first car loan I wrote off the interest on my taxes just like on a house. The downside is more people taking on more debt, may be good for the economy but not for the individual.
koloth44 10:55AM (2/04/2009)
They are probably talking about the life of the loan. On a $25,000 loan at 6% on a 60 month term, the payment is about $484/mo, for a total of just over $29,000 paid over the life of the loan. That's $4,000 in tax write offs and $1,000-$1,500 or so in actual savings.
Deciding factor? Probably not. Better than the nothing you get now? Yup.
Anthony Gentavoe 8:41AM (2/04/2009)
So, purely from a numbers standpoint. Example 1 would be the buyer that shops for a new car based on monthly payment they feel they can afford and does not shop around for best price or interest rate, but gets excited that they can now write off the interest on their taxes. Example 2 is the educated buyer that purchases responsibly and shops for the best rate (and I will assume for this example that the interest deduction does not exist).
Example 1: $25,000 loan @ 6.9% = $1,750 in interest, at a 25% tax bracket, it "reduces" tax burden (i.e. "saves the buyer") = $437.50
Example 2: $25,000 loan @ 4.9% = $1,225 in interest, actually saves $525.00 over example number one without the added burden of spending additional time filing their tax return.
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YouFaceTheTick 8:49AM (2/04/2009)
"actually saves $525.00 over example number one without the added burden of spending additional time filing their tax return."
Burden? I own multiple homes, renters, have a gazillion write-offs and filing taxes takes about 1-2 hours total.
There's a burden to this? Also, if one is sensible they can change their withholdings so the net is zero - or so you owe about 1k to uncle sam. It doesn't take much effort to figure out what's needed to be in the just barely owed side...
kballs 12:32PM (2/04/2009)
Also purely from a numbers standpoint, 0% financing for the life of the loan is better than a tax write-off of interest, because you save ALL of the interest (~$1500) instead of just ~$500 in federal tax savings (not to mention the people who don't have enough deductions to itemize).
Of course, if you can pay off your loan faster with extra principal payments, cash rebates can be even better than 0% financing since you'd be getting say, $1-3k off the purchase price, and with less interest that could be a $2k+ savings. You have to compare what you'd save in interest with the 0% financing with the cash rebate (if the rebate is bigger, take it, if the rebate is the same and you can pay extra principal, take it).
Dude 8:58AM (2/04/2009)
This is a stupid idea. The last thing Americans needs right now is more debt created from purchasing depreciating assets.
This is just a creative form of pork to help auto dealers.
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