Hello everyone. I am back from my long summer break now and what caught my interest during my travels was a couple who said that they loved to pay taxes. Seriously, they love to pay taxes. They think they need to pay more taxes. God bless their souls. No matter which side of the political aisle my friends sit on, I have never heard anything like that before.
Are they some kind of Warren Buffet wannabes? Just that they do not realize that their net worth is possibly a millionth of Mr. Buffet's or plain simple people who just do not understand how to maximize their dollars? I don't know, but I had to write about it, you never know there might be more people like them!
Lets use this oversimplified example of men and their driving machines. A is a simple man and B is a smart woman and both make $ 100,000 per year. The federal tax on that amount is about 25%
Simple man A happily pays his taxes and is left with $ 75,000 to spend. He buys a Toyota Rav4 for $30,000. His financials look somewhat like this.
Tax: $ 25,000
Purchase of car: $ 30,000
Total expenses: $ 55,000
Assets: A Toyota Rav 4 and $ 45,000 of cash. And he is very happy.
Smart woman B on the other hand, buys a BMW X1 for $ 40,000. Since she uses it primarily for business purposes, she can deduct up to $ 25,000 of a heavy SUV from her pre-tax business income.
So her taxable income is now $75,000. The federal tax on that is about 18%.
And here are Smart woman B's financials:
Tax: $ 13,500
Purchase of car $ 40,000
Total expenses $ 53,500
Assets: A BMW X1 and $ 46,500 cash. Ladies & gentlemen, "Smart is the New Rich".
Personally, I don't see the US tax code being simplified anytime in the near future. It is important that we be tax smart and use the system to our own advantage. Unless, you are some sort of ascetic. Then, of course, you should not be reading this blog:-)
Footnotes:
1. "Smart is the New Rich" is the title of a book by CNN anchor Christine Romans. I have not read the book, but have watched her show occasionally and agree with her most of the time. In this blog I am only borrowing her very ' true and catchy' title.
2. Please note: The example in this post is conceptual and intended solely to create awareness not to serve as financial advice. Please seek professional help specific to your needs if you think you will be eligible for similar or other tax credits.
2 comments:
Hi Christina,
Question on your scenario. Can the woman actually write off that much of the expense right away? I was thinking that a vehicle employed for business use has to be dedicated only to business use and depreciated over time. I've never had a vehicle used exclusively for business, so I don't know the tax rules on that one. I've always done the depreciation over X years and deducted maintenance/mileage.
This is an oversimplified example, and unfortunately, there is no direct answer ever, to any tax question, in this country!
But the rule of thumb is to check both the standard rate deduction and the actual deduction ( check every year) and then decide based on your total taxable income income which would be better option for you.
Also, if you own more than one car you can consider designating one as the business vehicle.
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