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Ask The Experts: New Vehicle Tax Deduction

Tuesday, September 04, 2012

Q: We are wondering if buying a new vehicle would be a good tax deduction for us. Our current work vehicle is paid for, but it’s 8 years old. If replacing it will give us a tax break, we’ll replace it. But if it won’t make a big difference tax-wise, we’ll keep the vehicle. What’s your advice?

A: 
Never spend money just to get a tax deduction. You will never be ahead of the game by spending money just to avoid taxes. So, if the existing vehicle is meeting your needs, then certainly do not go out and spend your hard-earned money just to increase a tax deduction.

Having said that, buying the new vehicle would most likely increase the overall tax deduction related to vehicle usage. Again, the only reason the deduction would be higher is because you are spending more.

So if the intangible benefits of the new car and the “want to” side of the new car are high enough that you are going to get a new one anyway, then buying one before the end of the year could increase your tax deduction and therefore lower your overall taxes.

But again, do not buy the new car because of an expectation of an increased deduction. Instead of the new vehicle, consider increasing your contributions to a qualified retirement plan such as a simplified employee pension plan or traditional individual retirement account.

Contributions to a SEP can be made in any amount up to 20 percent of the net earnings that you have from the business. Your contribution goes into an investment account that will fund your retirement years. And the contribution is deductible on your Form 1040.

This is a much wiser investment, in my opinion, than spending money on a new car.


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