At the Showroom, Don’t Forget the Deduction

As 2010 car models start creeping into showrooms and auto dealers lay on incentives in the hopes of beating the continued decline in car sales, buying a new car may start looking like an attractive option again.  And even with the end of the Cash for Clunkers program, the US government is still willing to give you a nudge in the “buy” direction.

For any new passenger vehicle purchase made between February 17 and December 31, 2009, inclusive, you may be eligible to deduct state, local, and excise taxes from your 2009 federal income tax.  The only two restrictions are: (1) the deductible taxes are limited to those levied on the first $49,500 of the purchase price (that is, you don’t get a higher tax deduction simply for buying a Lamborghini), and (2) you can only take the deduction if your modified adjusted gross income (MAGI) is less than $135,000 if you are filing individually or $260,000 if you are married and filing jointly.  The deduction is also phased out for individual filers with MAGIs between $125,000 and $135,000 and joint filers with MAGIs between $250,000 and $260,000.

Other than the limitations above, the deduction initiative is quite generous.  It covers not only cars, but also light trucks (maximum gross weight of 8,500 pounds), motorcycles, and even motor homes.  You can take the deduction for as many new cars as you buy during the period, as long as you are eligible within the two restrictions detailed above.   Furthermore, even if your state does not have sales taxes, you can still deduct fees or other local government taxes associated with the vehicle, as long as they are based on the purchase price or assessed as a per unit fee.

While this deduction may not stir car purchases in the way the now-extinct Cash for Clunkers did, it may still prove to be a nice incentive when coupled with all the markdowns on 2009 models and the extra features added to the 2010 models to boost holiday season sales.

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In Europe, Have Your Age Subsidize Your Travel

If you are planning a trip to Europe and are 25 years old or under, make sure to look for discounts not only at attractions that commonly offer student discounts such as museums and performances, but also on transportation.  In contrast to the American standard practice, in Europe most discounts are available for people aged 25 and under (with proof of ID) rather than for students regardless of age.  And transportation networks are usually included.

In England, for example, you can buy a 16-25 Railcard for £26, which gives you a 1/3 discount on virtually every train fare throughout the UK for a whole year (even once you turn 26, as long as you bought it when you were still 25 years old).  This includes the express trains to and from Heathrow and Gatwick airports.  Importantly – and this is not frequently advertised – if you get the Oyster card for transportation in London (and you should), your Railcard can also be linked to it and lower your daily cap.  For example, a single ticket for off-peak travel in zones 1-2 of the London tube (as a tourist, those are probably the only zones you will need) is £1.60, but if you use an Oyster card and take multiple trips in one day, you will be charged a maximum of £5.10 per day.  With the 15-26 Railcard, while you do not get a discount on the single fare, your daily fare is capped at £3.35.

For travel between European countries, the Eurostar and the Thalys also offer youth discounts.  A youth one-way ticket on the Eurostar from London to Paris departing this Friday (September 04, 2009) at 11:30, for example, is £72, compared to £84 for the standard non-flexible fare.  Prices are lower and discounts are larger during the week and if booked in advance.  And on the Thalys, a high-speed rail connecting Paris, Brussels, Cologne and Amsterdam (and several Belgian and Dutch cities along the way), youth fares are generally around half the price of the most flexible fare offered.  Travel from Amsterdam to Brussels on a youth fare, for instance, is as low as €29, while the flexible fare costs €57.

So whether your are planning on just visiting one city in Europe or backpacking throughout, remember to carry your ID and ask about youth discounts on transportation if you are 25 years old or under.  This will help you cut down on sightseeing costs and free up your budget for souvenirs, food, and even a splurge.

The Alternative to Car Ownership

If you are an urban dweller, Zipcar offers you an alternative option to buying a car – sharing a car with everybody else in the city.  You can join the Cambridge-based company, which started with the vision of lowering pollution and the number of cars on the road, on either an Occasional Driving or Extra Value Plan.  The cost of reserving a vehicle is $9.25-14.50 per hour, depending on the model of the car and whether it is a weekday or weekend.  With the Occasional Driving Plan, you have to pay a $25 application and a $50 annual fee, but there is no monthly commitment.  Zipcar also offers four Extra Value Plans, differing on the the level of monthly commitment ($50-250), but the annual fee is waived and you get an additional 10-15% driving discount.  There are also daily rates under both plans (you are automatically given the lowest cost between the hourly and daily rate when you make a reservation), and there are no extra charges for gas or insurance regardless of the plan you choose.

Further, depending on your school, work, or even residential building affiliation, Zipcar may lower or waive the annual and application fees and even give you a lower hourly rate (in the application page you can search for affiliations which might get you the discount).  And if you know someone who is already a Zipcar member, you can also ask him/her to refer you, and Zipcar will give $50 in driving credit, which can be split between the two of you whichever way you want.  And if you sign up today or next Friday, you can get another $10 in driving credit – just use promo code DCFRIENDS.*

If you only need a car a few times each month, being a zipster would be a huge cost savings measure.  Instead of paying $200-300 in financing or leasing payment, and another $100-200 for car insurance, parking, gas and routine maintenance each month, you will only be paying for the hours you are using the Zipcar (plus the application and annual fee, if any).  And as a bonus, Zipcar has a variety of vehicles to choose from, so you could be driving a Volvo one week and a Mini Cooper the next.

Look chic, save money and save the planet?  Sounds like a smart idea to me.

* This is from an email I got from Zipcar: “On any Friday in July, if you refer your friend to Zipcar and they sign up that same Friday, you both receive $60 in driving credit instead of $50. In order to get $60 in credit for referring a friend, he or she needs to use the promo code DCFRIENDS when filling out our online application. After that, email our marketing coordinator, Lauren  (lsherman@zipcar.com), with your full name, your friend’s full name, and your Zipcard number. Just let Lauren know that your friend is applying, and she’ll make sure that everything is in order.  This cannot be combined with our standard referral offer, and it cannot be applied retroactively.

Car Buying 101

One of the most important rites of passage in America is getting a driver’s license.  And while you might have been licensed to drive someone else’s car since you were 15 1/2 or 16, the other part of this rite of passage is actually owning your first vehicle.  So without further ado:

Leasing – Car leasing is actually the opposite of car buying.  Like the lease on your aparment, car leasing is essentially renting a car.  But I would like to talk about it, because leasing a car certainly feels like you are buying a car.  Your monthly payments are lower than if you were to finance it, though your car insurance might be higher.  This option allows you to continually drive around a nice brand-new car.  The caveat is that at the end of the lease (usually 3 years), you have to return the car and it has to be in relatively good condition.  So despite diligently paying your monthly payments for the past 3 years, sadly the car will not be yours, although you do have the option to buy the car at the residual amount stated on your lease contract.

Financing – Continuing with our real estate analogy, car financing means you take out a loan to buy a car and you have about 3-6 years to pay off the loan, much like a mortgage.  The financing terms, such as the interest rate and length of time to pay off the loan, will depend on your credit score (which we will talk more about in a later post) and how much you can afford each month.  If you want to finance your car for 5 versus 3 years, for example, your monthly payments will be lower, but you will be paying more in interest in the long run. 

Financing limits the kinds of cars you can have since you should only buy cars you can afford.  The silver lining, however, is that you will actually own the car at the end of the financing period.  And financing is available for both new and used cars.  I don’t believe there is an absolute best choice between new and used cars, just a better choice depending on each person.  If the used car you are buying is only 1-2 years old though, you might want to shell out the extra few thousand for the new version.  The cash of clunkers act and the vehicle sales tax deduction also make for good incentives to buy new, at least during this year (click here to read more).

For more information, such as car reviews and pricing, check out Edmunds.

An Added Benefit for Biking to Work

If you ride your bike to work or are thinking of doing so – be it for your health, to save money, as a hobby, or any other reason – you may be able pick up a tax break along the way.  As of January 1 of this year, qualified bicycle commuting reimbursements of up to $20 per month (a total of $240 a year) are eligible for income exclusion, alongside qualified parking and highway vehicle transportation and transit passes.  That is, your employer can reimburse you for “reasonable expenses,” including bicycle purchase, improvement, repair, and storage, and the value will not be reported in your income, up to $20 times the number of months for which you are eligible for this benefit.

To receive this benefit you cannot receive any other qualified transportation fringe benefit on the same month.  It is ok, however, to receive different transportation fringe benefits throughout the year, such as a bicycle commuting reimbursement during the summer and a parking reimbursement in colder months.  To qualify for the bicycle commuting reimbursement exclusion on a given month, you must “use the bicycle regularly for a substantial portion of the travel between your residence and place of employment”.  The terms “regularly” and “substantial portion” are not explicitly defined anywhere in the Emergency Economic Stabilization Act of 2008 through which it was passed or in IRS documents, however.

But here’s the catch: unlike the other two qualified transportation fringe benefits, employees cannot choose to receive the benefit through pre-tax contributions [though a bill (H.R. 863) was proposed in February to change that].  Either your employer reimburses you or it does not. It may be in its interest to reimburse you, though, as a lower income reported for you means lower taxes for it, too.

Let your employer know if you want this benefit.  To learn more  and get information for your employer on how to set up a commuter solution for bike riders, visit The League of American Bicyclists’ webpage on the initiative.