Friends with Tax Benefits: So You’re Buying a Car?

Buying a car can be anxiety provoking. How do we know where to look, how much to spend, and when to pull the trigger? In this episode Daniel, Kat, and Lauren reveal their car buying tips, and answer some of your questions like: What are the best negotiation tips for purchasing a new car?

Full Episode Transcript:

Lauren: Welcome to this week’s episode of Friends With Tax Benefits. We’re talking about all things car buying and other car related expenses. And as I was prepping for this episode, I was thinking about the show, Modern Family, have y’all seen it?

Daniel: I’ve definitely seen it in the background. My kids watch it. It’s got that guy from Married With Children.

Lauren: Correct. Ed O’Neil.

Daniel: Al Bundy, AKA. Do I have that right?

Kat: Yes, that’s him.

Lauren: So in one episode of the show, Hailey, daughter on the show is turning 21, and her father, Phil, wants to buy her a car for her birthday. So he goes to the car dealership with his father-in-law, Jay, who is played, as you mentioned, by Ed O’Neil and chaos ensues. Essentially, Jay believes he can get a better deal with his hard line negotiation tactics and throws a wrench in Phil’s whole plan to buy this car.

Kat: I have not seen that episode, but I can just only imagine the chaos, the two of them and what their dynamic is. So I’m just making up my own episode in my mind here. And it’s hilarious.

Lauren: So Daniel, I know that you are in the middle of the process of car buying. What has been on your mind and what are you learning through the process?

Daniel: I’m learning that many car dealers are not walking in their customer’s shoes. I’m a little bummed out right now because of what’s happening with prices. I’ll tell you that this notion of scarcity is really changing the cost structure of buying a car, because as many people know, production issues have occurred during the pandemic. A lot of people have more money than they’ve historically had because they’re not spending on vacations. And so suddenly, there is a mismatch of supply and demand. And when there’s less supply than there is demand, then the price goes up.

And what’s wild is when there’s a MSRP, manufacturer suggested retail price, then dealers say, and this happened to me. I said, hey, that looks great. How much is that? And He said, “It’s this much.” And I said, well, that’s reasonable. Let’s do it. He said, “I forgot to mention the $5,000 market adjustment.” And I said, come on man. And he said, “Also, there’s a $3,000 required security package.” And I said, friend, you’re killing me here.

And so this notion of, I’m looking for an electric car, that there’s an $8,000 markup for stuff that is firstly pure markup, pure profit that they’re taking this $5,000. And then $3,000 in add-on crap that you don’t want, that just eats up the entire federal tax credit that you would get from buying an electric car. 

So there’s two things here, is one, you can do research ahead of time. This is something that I did and there’s one dealer in San Diego that does not do these markups. And so you just have to be patient and just say, “Hey, just call me when you get it.” And they do, and they say, “Oops, sorry, somebody beat you. You took one minute instead of 30 seconds to respond.” I said, doggone it.

But so it’s just, you can’t be in a rush. So that’s the first thing. And the second thing is really interesting because you know I’m a budgeter. My daughter’s about to turn 16. She’s about to inherit the 16 year old car that we bought two weeks before she was born. And I wanted to know how much insurance is going to cost when we have a third car and a third driver.

And it was fascinating, because there was two electric cars that we’re looking at, two different brands and they’re roughly the same price for these two cars, and the insurance guy said, “Oh, it’s going to be a lot more if you get this brand because they’re constantly have to back order parts, and so then if your car is in an accident and you have to back order parts, then you just have to have a rental car for a longer amount of time. And so it just costs more in your insurance because the car will be off the road and you’ll be driving a rental car.”

So that’s another thing I’d highly encourage people to do, is to say, if I get this car, what is going to be my insurance rate? Because you might think cool, I can afford the monthly payment, but then there’s insurance, which could be much more than you expect if you don’t call and find out what’s my give me a quote on this new car or that new car. So those are the two big ones that I’ve learned is say no to markups. You don’t need the add-ons and call your insurance company.

Lauren: Great tips. I think we often don’t think about all the costs to consider which insurance is a key cost of long term car ownership.

Daniel: Totally. And also I think people feel like, hey, if I buy an electric car, it’s going to be free, no fuel, that will come in your electricity bill. So it is not zero bill, unless you have solar panels, then it’s less than gas, but you still will have to pay for that in the form of higher electricity. So just keep that in mind because the full cost is really important to consider.

Kat: And Daniel, isn’t it that some vehicles like they don’t come with a charging station or port automatically in your home, like you might have to pay that additional fee or hope that you have a charging station convenient?

Daniel: That’s exactly right. There’s a bunch of infrastructural things your house has to have. When we moved to our house in San Diego, we did get solar panels, but they headed this huge upgrade on the panel, on the house for it to be able to take the required power that it takes to fill up a car with electricity. So that’s a great call out, Kat. And the other thing too is, there are certain brands of electric cars that have sold a lot, a lot of vehicles. You can probably think of the one that’s most well known. Once a car company sells, I think the number’s 200,000 vehicles, people do not get that tax credit anymore. And so if you are considering getting an electric car in part, because you’ll get such a knockoff as a tax credit, I mean, I think it’s close to $8,000. You won’t get that if you get cars that are very popular and have sold. So I think that there are two companies, both American companies that previously had tax credits, but no longer do because they’ve sold so many. So just keep that in mind.

Kat: So you’re right Daniel, you can get up to $7,500 of a tax credit for a vehicle and you’re right, it’s limited up to the first 200,000 models of that. And fortunately enough, the IRS makes it a little bit easy for you to find out that information on their website. There’s a list by car make and then it clicks down to model and it’ll tell you how many models have already been sold or if the credit is no longer available so you can actually go look through manufacturers that sell these electric vehicles to see if you would qualify for that tax credit.

But yes, there are some that surprisingly have sold more than those models. So for sure that’s something to include in your research, if you are exploring electric car. And those are only if it’s purchased new, like you don’t get the tax credit if you bought that electric vehicle used or are the second owner of it.

Lauren: So Kat, now we’re veering into territory of talking about some of the tax implications for car buying. As our resident tax expert, do you have any other tax tips or things to keep in mind when you’re in the process of buying a new car?

Kat: So maybe not as much buying a new car, but I think what’s interesting in this current landscape, like Daniel mentioned is that inventory and production are just not what they used to be, right? So we’re seeing a different market where I’ve seen lots of people share stories that they have sold their used car for more money than what it’s worth or what it costs them. Maybe they bought it used and they’re reselling it used again. So if Daniel weren’t handing his car down to his daughter, he might find himself in a situation where he would’ve been able to sell that car. Now, if you sell a car for more than what it’s worth, you do have to pay taxes on that gain. So on that profit, it’s considered a capital gain and you would have to pay capital gain taxes on that transaction.

So it’s not the person who’s buying the car, but rather the person who’s selling the car. The person who’s buying the car can typically expect, if you live in one of the 45 states that collect sales tax, that you will have to pay sales tax on the price of that vehicle. So likely when you go to your DMV to register the vehicle in your name, you’ll have the document that shows the title, it’s probably the title or a bill of sale that the person has sold the vehicle to you for the amount that you guys made the transaction for. You’ll go in and then you’re going to have to pay your state or county or both city sales tax for that vehicle. So that’s, as far as like taxes are concerned. And now depending on the state that you’re in and whether you maybe itemize your tax deductions or not, you may be able to include that as a write-off for some of the sales tax you pay.

But my car buying experience is definitely different than Daniel’s. I have actually never purchased a brand new car. I’m very much so team no car note. So even when I have financed the car, I’ve always tried to get it at a rate where I’m able to pay it off quicker or as soon as possible. And then I’m the person that’s going to invest in getting that car regularly serviced to make sure that I can drive it for as long as possible. Let’s say till the wheels fall off, like I’m really trying to get as much out of the car as possible.

Lauren: So I am also team drives the car until the wheels come off. My car is a 2012 model and I try to be really diligent on taking it in to the shop to get checked and tuned up so that I can keep it in really great shape for a long time. And I love not having a car payment. So when I got this car, my mom really encouraged me to make extra payments on it, to pay it off early.

Kat: Good job, mom.

Lauren: She had a lot of really great financial advice for me. But one thing that was really surprising to me and disappointing too, was when I paid off my car note, my credit score dropped really significantly, dropped by like 50 points or so.

Daniel: Really?

Lauren: Yes. And I realized that it was because I went from having different types of credit. I have my credit cards. I’ve got my revolving loan on the car. And when the car was paid off, I no longer had a secondary type of credit on my credit report. So it literally dropped by score like 50 points overnight.

Daniel: Hey Kat, when I do my taxes every year, it tells me, hey, did you pay for registration? That is tax deductible, isn’t it? And tell me why it’s tax deductible.

Kat: So it’s going to depend the specifics around it on your state, your state requirements, or if your state allows you to deduct the registration. And typically, it’s going to fall back into that are you itemizing your deductions or are you using the standard deduction? So if you have other things that you’re able to itemize as well, that doing itemized would be more favorable for you than a standard deduction, then those are things that are going to go into it, right? As along with maybe if you paid mortgage interest or charitable donations, those things all add together to be part of your itemized deductions.

But yes, I think it’s very important if you’re buying a brand new car or a used car to keep your records, know what you’re required to report and pay to your state and then keep it so that when it comes to tax time, when you are doing your taxes or a tax preparer is helping you follow the taxes and they say, “Hey, what did you spend on this?” You have those things handy because as we know, it’s always harder to backtrack for records.

Daniel: One more question on what is write-off able. If I happen to start a kombucha business and I write Daniel’s kombucha on my car and I use it for delivering to stores, does my car become write-off able if I have a small business and I put my business’s name on it?

Kat: So it will depend whether you’re going to use the actual expenses of the car, so that’s the dollar for a dollar, or if you’re going to track your mileage and actually write-off how many miles you use driving to and from stores like that. So for the business use of your car, you can likely have some of those expenses that go along with having that car written off. Now it won’t be a hundred percent unless the vehicle is a hundred percent for company business only.

Daniel: So I don’t have to put my business’ name on the car to do that.

Kat: No, you don’t. You don’t have to write Daniel on. I mean, if you do use some advertisement dollars to get that signed printed to put on your car, then that would be maybe a advertising expense.

Daniel: Cool. Well, I hadn’t put kombucha on it yet. It just says Daniel on the car and I’m just going to keep that there so people know who’s driving that car.

Lauren: For the record, I would buy your kombucha. It’s delicious.

Daniel: Yes. Thank you for that.

Lauren: And Kat, speaking of business expenses. So Daniel asked if he’s driving his car for business, what’s deductible? If you were, as an example, renting your car out on one of these peer-to-peer car rental services, what kind of expenses would be then deductible at tax time?

Kat: If your car is in essence, the business, because you’re renting out the vehicle. So yes, you’re going to have to report the income that the car makes. But then also there’s likely a lot of expenses that go into it. So once the person has returned the car, you might spend money on car washes in between transactions to clean and sanitize the car. You might have to buy some extra fluids for the vehicle or do some extra servicing or maintenance as it relates to the car. You may even have some commissions or fees that you have to pay the app that lets you rent out the vehicle through them.

I mean, if you were to offer your riders anything, like maybe every time you rented out a car, they found two bottles of water in the vehicle, then as long as it’s exclusively for the purpose of the business, then those things could be considered write-offs or expenses towards your business.

Maybe even you might pay to advertise your business someplace else on another platform like any other business you’re going to want to maintain your records and your receipts for the proof of what you’re spending in that. Maybe you even are paying more in your car insurance in order to have that service. Because now you’re having somebody aside from yourself or the individuals in your home, besides them are now driving the car. So maybe you’re paying a differential, like a difference on your monthly car insurance, because it’s going to be used for short term rental periods.

Lauren: Now it’s time for our weekly Q&A, we’ll be answering your cues about car buying with our resident tax expert, Kat and our car buying enthusiasts, Daniel. For those of us who are totally new to the car buying process, what does it mean to get preapproved for loan and how do you go about getting preapproved?

Kat: So there’s even some lenders that will allow you to apply online ahead of time. So similar to like if you were applying for a credit card, if you will, you’ll put in some basics about yourself, your income, they’ll ask you some things about your financial landscape and they’ll essentially run a credit history report on you. And it’s going to give you an amount that you would be approved for. And some places even have preferred like dealerships that they work with. So you can apply online. You might even be able to go into like your bank or credit union and apply with them in person or online. A lot of times now these days, everybody has it online as well. And then that way, you know what you can afford rather than just walking on the lot and falling in love with a car and it being out of your price range and you having to like now go back and re-look again.

Lauren: And Daniel, you are currently shopping for a car and it’s not your first time at this rodeo. What are some of the tips that you’ve learned along the way when it comes to negotiating and landing a great deal?

Daniel: What I’ll tell you, I learned a few really great tips in doing some research for my own purchasing of a car, and also in preparing for this podcast. When you go into buy a car and they say, boy, Kat, do I have a financing deal for you? 3.5% interest rate. You can come in and say, that’s cool brother, but I’ve got a 2% interest rate for my bank. And so it gives them a benchmark that they have to essentially negotiate against. And if they can’t meet your 2.0% interest rate that you got from a bank or a credit union, then you say, thanks. So they’re incentivized to meet or match the interest rate that you got from elsewhere. So just do your homework ahead of time on what interest rate you can qualify for and then use that to negotiate with the dealer.

Lauren: Is it better to buy with a low interest rate or paying cash if you can afford it?

Kat: This is going to be one of those questions where I personally think it’s a matter of preference, right? If you’re going to pay for something in cash, a car, especially, it’s not a small purchase, it’s going to be several thousands of dollars. There’s no car that you’re likely getting for very little money. So maybe if it makes sense for your financial situation that you can pay the car outright, then sure. But like Daniel previously mentioned, maybe you’re getting an interest rate at 3% for the vehicle, but you have some other consumer debt that’s maybe at like 17% and it might suit you to use that available funds someplace else. So it really just depends on your situation, but maybe you could make your monthly payment lower or the life of the loan lower by putting more money down when you’re purchasing it instead of just giving them all of your cash.

Daniel: I got a little bit to add to that. So the first thing I learned regarding paying with cash versus financing is if you are lucky enough to be paying in cash and to have saved up, which I happened to have done, you don’t want to tell the dealer that because again, they will think that they’re going to get… They’re going to hope that they’re going to get additional money from you in the form of financing. And so when you’re negotiating the final price of a car, don’t tell the dealer that you’re going to be paying for the car in cash, which is counterintuitive to what I thought. I thought, oh boy, I have great credit. I’ve saved up. And so I’m going to say, hey man, I’m going to buy this car. It’ll be the easiest transaction of your life.

Well, if I tell them that, then they know they’re not going to get any additional revenue from financing. So they’re not going to want cut me a good deal on the price of the car. But if they think, oh, okay, let me knock a thousand bucks for this guy, but I’m going to get it back and then some, then you won’t get that. So hold that close to your vest until you get that final number on what your cost of the car is from the dealer. And then you can say, hey, guess who’s been saving and he’ll say, “Doggone it.” So that’s one thing about paying in cash.

And the other thing too is you made a point about you can use the money elsewhere. Some people might say, well, I have no consumer debt and I have the money for cash. And you could get a 2% loan and you could make 5% growth on money that you put into stocks, but it’s not a sure thing. And so if you say, I’m going to try to invest, I’ll take $15,000 and put it down and pay monthly and I’ll make money on investments. It’s just not a sure thing. And then you still have a monthly car payment and I’m just a huge fan of not having a monthly car payment. And so even if I could make more money with the money that I’ve been saving up, I’m just going to feel like I’m winning at life by not having a car payment.

Lauren: And you’ve both mentioned consumer debt. Do you mean credit card debt specifically?

Kat: That’s what I’m thinking of. That’s most common debt that folks might have. If you’re fortunate to not have it, then I think Daniel’s advice is great. But if you do, you might want to consider the money that you’re essentially losing out on by paying those interest rates on that credit card debt.

Daniel: The other one could be student loans too. And again, just heads up. There’s a pause on those. And so don’t forget that likely when those kick back in, you’ll start having to pay again. And so just remember that as a future payment if you’re not paying student loans right now.

Lauren: Thanks for the reminder. How do you get the best interest rate when buying a new car?

Kat: Primarily one of the biggest things that’s going to go into it is your credit score and your credit history. So to determine like your worthiness or how much they’re willing to give you, they’re definitely going to look back on your credit score to see what your history of paying on large things or bills are like. So that’s one thing. Then playing in hand with your credit score is when you’re shopping, you’re going to want to make sure to do your shopping for your car within a two week period, because credit agencies like FICO are going to use that 14 day period that you make an inquiry like on your credit. So when they’re trying to see what you can get approved for, if you go to different lenders, you get preapproved online and you go to a dealership and you maybe go to a credit union. All of those inquiries are all going to show up as essentially one inquiry that you’re shopping for a car if it’s done within the 14 day period.

Now, if you start car shopping now, and then you wait another month and then you pull it again, it looks like you are constantly trying to make this large purchase. So it could actually negatively also affect your credit by having those inquiries against your credit.

Also, just read the fine print and know what you’re signing yourself up for. If you are going to finance the car, don’t just focus on the monthly payment because sometimes you can get financed over a six or a seven year period. And you’re just focused on like, “Yeah, I can afford that each month.” But then once you look at what the life of the loan is going to cost you, you could easily be paying two to three times the amount of what the car’s sticker price is now at the end of that. Don’t max out your budget, it’s better if you are going to have to finance it, if you’re able to make a little bit more payments towards the principal every month, so that way you’re chipping away at not only the life of the loan for how many months you’ll have these payments for, but also how much it’s going to cost you.

And then definitely read the fine print, especially if you’re going to a smaller dealership or a used car dealership, you want to make sure the loan that you’re signing up for with that interest rate at that price, that there’s no like special, fine print in there that says you’re going to get penalties for prepaying it, so like paying early. Because that would be the worst. That means they’re trying to lock you in to have the car for as long as possible to make as much money off of you as possible. So you want to make sure there’s not a clause in there that there’s penalties if you make some additional payments or if you make a little bit extra than what’s required of your minimum.

Lauren: Daniel, Kat, always a pleasure.

Daniel: You too, Lauren, you too Kat. I hope next time I talk to you, I am rolling up very quietly with no internal combustion in a new vehicle even though I work from home.

Lauren: Do you mean in your new whip?

Daniel: My new whip, as I thought it was called a “Whip Cat” last week, it was “Whip, Kat” and my new whip. Yes. But it’s cute because my daughter is very much looking forward to that Hooptie. She feels like it fits her personality.

Kat: You know what? Make sure you add a little bells and whistles, new air freshener for her and put a bow on it all the same.,

Daniel: I like that idea.

Kat: And I can’t wait to hear what you’ve locked down Daniel and to talk to you guys next week.

Daniel: Bye.

Lauren: Bye. Catch you next time.

Kat: Bye.

Lauren: Thank you so much for listening to this episode of Friends with Tax Benefits. Be sure to hit that subscribe button and follow along wherever you listen to your podcasts.

The views, information or opinions expressed during the Friends with Tax Benefits podcast series are solely those of the individuals involved and do not represent those of Intuit, TurboTax or any of its brands. The primary purpose of this podcast series is to educate and inform. This podcast series does not constitute financial, legal or other professional advice or services.