Is It Worth It? New Car Tax Credit v. Buying Used for Less
February 20, 2009 by Miranda Marquit
Filed under Finance
When I wrote about the personal finance measures in the economic sitmulus package, one of the items I mentioned was a tax credit for the sales tax on a new car. One of the commenters, Jane, thought it would be interesting to see whether or not the tax advantage was worth it. So I thought I’d do a very simple work-up of how things might have played out had we bought a brand-new Prius instead of the used Prius and taken the tax credit.
In our area, a new Prius costs, at the low end, $24,538. We would get a tax credit for the sales tax, which is 6.65%. So, our tax credit would have been $1,631.78. Now, after a year, according to Kelley’s Blue Book, the 2008 Prius is worth $22,495 retail, a difference of $2,043. Any trade-in or private party arrangement would be worth even less.
We, on the other hand, got a 2007 Prius for $14,997. Just the difference in what we financed renders the paltry tax credit Totally Not Worth It. To be fair, we did get the car so cheap on a pricing error. The dealership actually wanted to sell it for $18,599, but some yahoo listed it online for much lower — and we called them on it. The Blue Book value for the 2007 we got is $19,020. Obviously we got a screaming deal (yes we pulled the Carfax). But even if we had paid what the dealer wanted, it still would have been better to get the used car. It’s only a couple of years older, and the interest savings for the auto loan would have been tremendous — more than able to overcome the “value” of the tax credit. I suppose if we had decided to go with a new stripped-down model of some other car, the tax credit might have been worth taking. But we wouldn’t have the car we want.
If you can find the right deal on a new car — and they are out there — the tax credit can be a nice bonus. Since we were hooked on the Prius, it just didn’t make sense for us. But I can see where some car brands — especially a Kia or something in that vein — would be a great deal with the tax credit added in.
Personally, I think that if Congress was going to give out this tax credit to stimulate businesses, they should have allowed everyone to write off the sales tax. Honestly, how many people can afford a new car right now? How many people can get approved for the loan they’d need to buy a new car right now? Not very many, I’m thinking.
What about your situation? Would you be better off just buying used rather than buying new to get the tax credit?
Take into account that all auto dealers are desperate to move their new inventory for accounting purposes. I bought a 2008 Accord last January for less than the used 2007s on the lot. It’s all about negotiation, there has never been a better time to buy a new car.
THAT I’ll agree with. Which is part of the reason we moved up our timetable for buying a second car. Depending on what you get — and what the dealer is willing to do for you — you can get a good deal. And if you can get a great deal on a new car right now, the tax credit CAN be a bonus.
thanks for the post. spot on.
i also think that this is to try to help the car dealers move more NEW cars.
i agree that they should have given the credit to anyone that buys a car, used or new.
who are they really trying to help here? hmmm….
the other advantage to buying a newer, but used car, is that when paying the dmv fee here in colorado, the fee is based on the value of the car, which depreciates every year. so we factored that in too.
Good point, about the fees. We have to pay property tax on the car here in Utah as well, so it is nice to have a slightly depreciated car from that standpoint. The point is to help factories turning out cars — so that maybe if enough demand is created for new cars, factories won’t have to shut down. Whatever. GM just asked for billions more, and the company is still laying off tens of thousands of workers.
I bought a new 2008 Toyota Matrix last year – I wish I could have written off the sales tax (right when the 2009 models were coming out). On the new vs. used front, certified two year old used Matrixes (Matrices?) with 30K miles were selling at only $2000 less than the initial quote I was offered on the 2008. My negotiating narrowed the gap further. Some cars hold their value better than others.
You are so right that some cars hold their value better than others. Our Saturn wagon, for example, is practically worthless.
I will never buy a new car, it is just such a bad deal. As soon as you drive that new car off the lot the value drops by thousands of dollars.
Buy that same car 2-3 years old with low miles, and you’ve saved 5-10 thousand dollars – on a depreciating asset, which, let’s not fool ourselves – cars are. Some hold their value a little better than others, but still.
For me it’s a clear choice to buy used, and this tax credit does little to change that.
Granted – i know the car dealers and others will be happy for this because they are hurting right now!
Both of our cars were single-owner cars, only two years old. I agree, Peter, that the depreciation often makes a brand-new car hardly worth the money.
I agree, it is more pragmatic to buy used and had they (congress) allowed this tax credit to mature, it should have had a clause for used, American cars $5000 and up, as another post stated, the banks are not exactly freely lending to make this a viable break. I also ask about say, those of us that have returned from Iraq with a service connected disability and recv. Veteran’s Disability pay, we pay no taxes on income, and only file if itemizing; will the dealer take the % off at dealership or do we pay the tax and file later? I ask because the DMV is still going to make one pay a sales tax, and maybe a bit more thought should have been put into this, as I see no advantage financially, buying new, when it is a buyer’s market for used with so many people needing extra cash, selling that third or second car. I am more annoyed at the minions that are on SSI getting a rebate check that have never paid a cent in any taxes, (FYI-that is difference between SSI and SSDI–SSDI a person has pd enough credits to recv these benefits), SSI includes all the refugees from N. Africa that are practically air-dropping onto the USA. I know it is off-topic, it is just a thorn in my Veteran’s Butte of my gun. Why were Motorcycles not included as well?
Thank you for your service, Robert! Don’t even get me started on the government’s lack of gratitude to our fine military personnel…
Anyway, I agree that a lot of things in this bill (and other economic stimulus spending) weren’t really thought out particularly well.
Miranda,
You are quite welcome! You may have heard how hard it is to get on SSDI? Well, I filed for SSDI and VA benefits as soon as I was medivac’d home six years ago. You would think the VA would be the first, but Bush had a lot of terminologies changed, making it even harder to get VA benefits if disabled. I got SSDI three yrs BEFORE I got VA benefits, and this is happening all over the USA, the VA taking up to 6-? yrs because they are so behind as well. There has to be more cash pumped into the VA as well–please readers: write your congressperson–off-topic and sorry, just thought I might educate people how ‘well’ we are being treated for an UNJUST WAR!
I am sorry for the diversion of orig post and to that I would like to know if one can say take the tax credit of buying a ‘green’ car/Prius and also take the tax rebate for owning one in taxes? Both or only one benefit?
Your diversion was more relevant than some of the other thread-jacks we get here ;) Anyway, I’m not really sure how that works. I’m actually going to talk to my accountant about it on Wednesday when I go in to get my taxes done.
Hi. Regarding the income tax incentive for buying a new car, will I still get this approximately $1,500.00 tax incentive for buying a new car if I do my Federal taxes using standard deductions and I don’t itemize ?
thanks.
The tax won’t save you money until next year, since it is for 2009. Here is what Bill Smith from the National Tax Office said on the Washington Post Q&A:
It is a deduction for the sales and excises taxes paid on a new car purchased in 2009, up to the first $49,500 of purchase price. So it is a 2009 item, not 2008. You can add it to your state income tax deduction if you itemize, or it can be added to the standard deduction if you do not. If you elect to deduct state sales taxes instead of state income taxes (an option), it should be included, or if not, added. (http://www.washingtonpost.com/wp-dyn/content/discussion/2009/02/12/DI2009021203010.html)
Anyway, as always with the nitty gritty of taxes, I suggest you speak with a tax professional to see exactly what you are eligible for, and the proper procedure.
You lose more than $1,500 in depreciation when you drive a new car off of the lot. The best deal is always a good used car with low mileage. And negotiate hard, it is a buyer’s market like never before.
Great point! It is a buyer’s market. If you are looking, you have the upper hand.
I’m a CPA. You can adjust the withholding on your wages if you expect additional deductions/credits for 2009.
Also, if you are financing a car, sometimes you get a cheaper interest rate with a new car instead of a used car.
It really depends on which car you buy. 2-3 year old used Honda’s are selling for just under or just as much as new 09’s. This is a good deal if you can get a vehicle that will retain more than 70% of their value after 3 or 4 years at a deep discount.
Do you know if someone can get the new car tax credit and the clean fuel tax credit?
Thanks for the reminder that we can adjust withholding. Indeed, it’s better to adjust withholdings and use that money to invest than to give the government an interest free loan. You’re point about the interest rate is a good one, and it depends on whether or not the difference makes up for the large amount you are spending on a new car.
Always? No… say you’re buying a Ford Fusion 2009… save $1000 in taxes, and take the manufacturer’s $3500 cash back. Beats depreciation and more right there.
It’s all about the individual vehicle and how things work out for your personal finances. And, of course, what kind of deal you can work. In some cases, it’s worth it to buy new and get a tax credit. But in others, you’re better off buying used.
You are right that it all depends on the car you get, the deal you can wrangle and what fits your needs.
You should be able to get both at once, if you qualify. A knowledgeable tax professional can help you determine whether you qualify, and whether it is worth it.