By Brian, CPA
As a result of recent economic conditions and policy moves, Congress has created more and more liberal tax incentives than I have ever seen in my long years of doing income tax work. If you happen to be in a position to take advantage of them, the savings can be huge. OF COURSE, as my parents said so often, a bargain isn't a bargain unless you would have bought it anyway....
By far the largest for consumers is the liberalized first-time homebuyer credit. It's claimed on IRS Form 5405. In general, for the purchase of a qualifying first-time principal residence this credit is available for 10% of the purchase price, up to $8,000 for 2009 purchases. It's critical to note that this credit fundamentally changed radically for 2009. For 2008 it was a good deal, but really only an interest free loan that had to be repaid over 15 years through the purchaser's tax return. For 2009 there is no repayment as long as the house remains the principal residence of the purchaser for 36 months.
There is even an option to claim the credit on an amended 2008 return for a 2009 purchase, so that the credit comes in much sooner than it would if you simply claimed it on your 2009 return. (But not TOO quickly, as Form 1040X, the amended return, cannot be electronically filed and refunds are not direct deposited; the form indicates it can take 8 to 12 weeks to process.) The credit is even refundable - you did not have to have $8,000 of tax to get an $8,000 credit, you still get the full $8,000 credit (for a house over $80,000). Which basically means any qualifying 2009 purchase of a first-time residence can result in an $8,000 check from the US Treasury. (It can be less...there are phase-outs at higher incomes and other possible wrinkles.)
For those fortunate enough to qualify AND be in a strong enough financial position to make that leap, the combination of low interest rates, desperate sellers (a buyer's market if ever there was one), and an $8,000 IRS sweetener, plus the usual tax advantages to mortgage interest and tax payments, make compelling arguments in favor of STRONGLY considering this.
Congress has long encouraged the purchase of fuel efficient vehicles through tax credits for hybrid or other advanced technology vehicles. Generally the hybrid credit is only fully available for the first 60,000 qualifying vehicles sold by a manufacturer. Toyota, as the leader in hybrid vehicles, has long been phased out; Honda credits ended in 2008, and Ford is being reduced now. But some credits remain, as shown at http://www.fueleconomy.gov/Feg/tax_hybrid.shtml ; credits can be as much as $2,350 on a Nissan Altima hybrid (which unfortunately is not normally sold in our area, although I've found a few new ones online.) The new lean-burn diesels, including the VW Jetta TDI, qualify for a $1,300 credit.
A new incentive exists to trade your old gas guzzler for a new car. Just passed on June 19th, the "Cash for Clunkers" program gives a $3500 or $4500 voucher good immediately at qualifying new car dealers toward the purchase of a new car. (Or as immediately as the program is ramped up, probably in late July, and for purchases before November 1, 2009 (if not extended). Qualifying "clunkers" are vehicles less than 25 years old (an inadequate nod toward the antique car hobby), continuously owned and insured for a year as of the time of purchase of the new car, with fuel mileage of no more than 18mpg.
A $3,500 voucher is available for purchases of cars with combined EPA ratings at least 4 MPG greater than the "clunker" or light trucks at least 2 MPG higher. The $4500 voucher is available if the new vehicle is 10MPG higher (for a passenger car) or 5 MPG higher (for an SUV or light truck.) The old vehicle MUST BE scrapped by the dealer (which tremendously offends my Pennsylvania Dutch sensibilities and car buff background), so the voucher is the ONLY trade-in you'll get. So it effectively serves as a floor for your qualifying trade....no advantage for a car worth $6,000, but very tempting for my 12 year old Explorer that Carmax recently offered me $1500 for.
I think this is horrible public policy both from a budgetary viewpoint, because viable cars are removed from the market at the low price end (and donations of cars will go down), because we usually ignore the cost in energy consumption to PRODUCE a new gas sipper (while someone who drives little can quite cost effectively drive the old gas guzzler instead) and because today's clunkers are often tomorrow's low-dollar classics. (For anyone who believes nothing made in the 1980's will ever make "classic", I need only point to 1960's Corvairs, 1970's Pintos and Vegas, and ANY original Volkswagen Beetle - all now collected avidly. Those just getting into the hobby often look to what was popular in their youth.)
But if you were considering a new car purchase anyway, AND are not excessively strapped to do so, AND have a qualifying car, it's certainly a consideration. Bad public policy can still be good for the individuals receiving the incentives!! Having said this, even with all the incentives, a three to six year old car in good shape may still be the better buy. And fixing the car you own is usually the best buy of all.
Just remember - "A bargain isn't a bargain...."