Tax Reform Dilutes Auto Writeoffs

QUESTION: I recently got a promotion and I had to buy a car for my new job. Some of my new co-workers say they think I qualify for a tax writeoff on at least part of the purchase price and on some of the monthly expenses. But others say the tax breaks ended with tax reform. I’ve never taken tax writeoffs before, so this is all new to me. Can you help me sort this out?--H. D.

ANSWER: Tax reform diluted the value of auto writeoffs, but it didn’t eliminate them entirely. So, if you use your car for business purposes, which it appears you do, you can still qualify for at least a partial writeoff.

As under the old tax laws, you still can deduct from your income the portion of your car expenses that are directly related to your business. In other words, if you drive the car to and from work, to and from social engagements and on job assignments, you can deduct only those expenses associated with your on-the-job use of the car. Even the miles you drive to and from work count as personal expenses, not business expenses.

After you figure what percentage of the car is a business expense, apply that ratio to the purchase price of the car (for more on this, keep reading), gasoline and oil, car insurance, parking fees, repairs and any other expenses not reimbursed by your employer.

Now for the bad news. Before tax reform, you could also have deducted the interest portion of your monthly car payment. But Congress decided to phase out all consumer interest deductions except those associated with a first or second mortgage. This year, only 65% of consumer interest expenses are deductible. The percentage dwindles to 40% in 1988, 20% in 1989, 10% in 1990 and zero in 1991.

In other words, you figure what part of your car payment goes toward interest. Then, figure what part of that amount is associated with the business use of your car. And third, multiply that last total by 65% and that is your allowable interest writeoff.

Tax reformers also eliminated the investment tax credit that business car owners once were able to take. And they further diluted the value of auto deductions by forcing taxpayers to write off the purchase price of their business car over five or more years instead of three under the old tax law.

Since you have never taken tax deductions before, you may not know that for such large business purchases as a car, taxpayers aren’t permitted to deduct the full purchase price from their taxable income in one lump sum. The deduction has to be spread out over a number of years dictated by the IRS. For a car used in business, this “depreciation” period used to be three or more years. Beginning with cars purchased this year, it is five years or more.

Specifically, a taxpayer is permitted to deduct the lesser of $2,560 or 20% of the purchase price the first year; $4,100 or 32% the second year; $2,450 or 19.2% the third year and $1,475 or 11.5% in the fourth and fifth years. If there is anything left to be depreciated after that, you may deduct no more than $1,475 a year. (And remember, these figures must be reduced by the percentage of your personal use.)

Q: My 12-year-old son just started a summer job as a box boy at a neighborhood grocery store and I was surprised to see that on his first paycheck, the store withheld income taxes! I called and talked to the manager and he said he is required to deduct money for federal income taxes and Social Security taxes. Can that possibly be true for a 12-year-old kid who is only going to be working for three months?--F. T.

A: The manager is partly right. He does have to withhold money for Social Security taxes. But your son can stop the income tax deductions if he paid no federal income taxes last year and doesn’t expect to pay any this year.

All he has to do is file a new W-4 withholding form, checking the boxes that show why he is claiming a withholding exemption.

His wages for the year can add up to as much as $2,540 before federal income tax would be charged.