Author Topic: Buying a $43,000 Car With a $28,000 income  (Read 6032 times)

Homey The Clown

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Buying a $43,000 Car With a $28,000 income
« on: February 02, 2016, 07:58:55 AM »
We own a Chevy Volt (which we love and got a great deal on) so I'm a member of the Volt Owners FB page. A woman posted complaining that Turbo Tax wasn't giving her the full $7,500 tax credit on their Volt, which they paid $43,000 for. People mentioned that the credit was only against your tax liability at which point whe said they were a family of 4 with an income around $28,000. Many people explained why she wouldn't get the credit, but none questioned the wisdom of buying an expensive car with a really low income. She was planning to use the $7500 to pay off some of the car and refinance. She felt "tricked" by the dealer who factored the credit into the price they were telling her. Of course it's not their fault that she should never have bought the car with that income.

Making Cookies

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #1 on: February 02, 2016, 08:10:55 AM »
Is there an equation for that tax credit? Is there an easy way to figure out a person's tax liability?

I'm really a newbie to that side of the tax mechanism. Have always had simple taxes because we never had much but over the past few years, this has changed and we are doing well.

MgoSam

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #2 on: February 02, 2016, 08:17:18 AM »
Is that $43k with or without the tax credit? Either way, that's a ton of money to spend on that income.

Homey The Clown

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #3 on: February 02, 2016, 08:26:00 AM »
Pre-tax credit, and I assume that's the OTD price. The tax liability is basically the last line on your 1040 before you figure out your refund or money owed.

Chris22

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #4 on: February 02, 2016, 08:27:07 AM »
Is that $43k with or without the tax credit? Either way, that's a ton of money to spend on that income.

It would be a lot of money to spend on that income if it was supporting one person.

For a 4-person family?  That's pretty much inconceivable, to the point where I wonder how they got approved.  Do they have no other expenses at all (ie, housing free and clear or provided by family)?

Helvegen

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #5 on: February 02, 2016, 10:22:22 AM »
Is that $43k with or without the tax credit? Either way, that's a ton of money to spend on that income.

It would be a lot of money to spend on that income if it was supporting one person.

For a 4-person family?  That's pretty much inconceivable, to the point where I wonder how they got approved.  Do they have no other expenses at all (ie, housing free and clear or provided by family)?

Subprime car lending is a huge thing now. They are giving loans to anyone that can fog a mirror. http://www.bloomberg.com/news/articles/2015-06-24/subprime-auto-loans-stretched-to-seven-years-stoke-debt-concern

Chris22

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #6 on: February 02, 2016, 10:42:54 AM »
Is that $43k with or without the tax credit? Either way, that's a ton of money to spend on that income.

It would be a lot of money to spend on that income if it was supporting one person.

For a 4-person family?  That's pretty much inconceivable, to the point where I wonder how they got approved.  Do they have no other expenses at all (ie, housing free and clear or provided by family)?

Subprime car lending is a huge thing now. They are giving loans to anyone that can fog a mirror. http://www.bloomberg.com/news/articles/2015-06-24/subprime-auto-loans-stretched-to-seven-years-stoke-debt-concern


Let's give the benefit of the doubt:

$43k - $7500 = $35.5k / 72 @ 0% = $493

($28k * (1- (.0165 + .062)))/ 12 = $2150

493 / 2150 = 23%

JUST ON THE CAR. 


(Edit: fixed formula error)
« Last Edit: February 02, 2016, 11:02:58 AM by Chris22 »

MgoSam

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #7 on: February 02, 2016, 11:01:21 AM »
Yeah regardless, it's insane that she is spending this much on a car. This would be too much even on a single person's budget. That said, there is the slight possibility that $28k is just what she reports on her W2, she could additional means of revenue that aren't reported.

gardeningandgreen

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #8 on: February 02, 2016, 11:19:01 AM »
Is that $43k with or without the tax credit? Either way, that's a ton of money to spend on that income.

It would be a lot of money to spend on that income if it was supporting one person.

For a 4-person family?  That's pretty much inconceivable, to the point where I wonder how they got approved.  Do they have no other expenses at all (ie, housing free and clear or provided by family)?

Subprime car lending is a huge thing now. They are giving loans to anyone that can fog a mirror. http://www.bloomberg.com/news/articles/2015-06-24/subprime-auto-loans-stretched-to-seven-years-stoke-debt-concern


Let's give the benefit of the doubt:

$43k - $7500 = $35.5k / 72 @ 0% = $493

($28k * (1- (.0165 + .062)))/ 12 = $2150

493 / 2150 = 23%

JUST ON THE CAR. 


(Edit: fixed formula error)

Yup as a banker this checks out. We will generally go up to 50% Debt to Income total for a car loan. So they could easily have that payment. Its a terrible idea and I don't recommend it at all but it is quite possible.

Jack

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #9 on: February 02, 2016, 11:25:05 AM »
Hold on a second. Are we talking about that $28,000 being total income (1040 line 22), AGI (1040 line 37), or taxable income (1040 line 43)? If it's total income, then yeah, she's an idiot. But if it's AGI or taxable income and she's got a whole bunch of other credits that reduce her liability to less than $7500 before this one kicks in, then that's more reasonable.

(Who am I kidding? It's probably total income...)

forward

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #10 on: February 02, 2016, 11:37:47 AM »

Spending that on a car with that income, yikes!  I can imagine a scenario where the dealer did 'trick' them in a way.

The dealer saying -this is car is so low cost to own, it gets 2-3 times the mpg's of your current car, no repairs b/c of the warranty and you can get a $7500 tax credit.  Sounds great doesn't it?

Clearly, they are responsible for their own financial health but that dealer made it all sound so great and there was no one on the other side saying - this is a bad idea. 

The sad part is it likely has created a long term financial anchor around their neck unless they get rid of it, take the loss and find an 8k car to buy.

gimp

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #11 on: February 02, 2016, 01:13:19 PM »
If subprime lending for cars is huge right now... one assumes that the car loans are packaged into pools and rated for risk, and then sold to investors.

You know, like mortgages in 2007.

Anyone know whom to bet against on these deals? I wouldn't mind profiting off the stupidity.

Jeremy E.

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #12 on: February 02, 2016, 01:38:39 PM »
I feel sorry for this family. For future reference, if anyone plans on buying a new electric car, they should see if they'll get the full tax credit, and if not, do ROTH investing rather than traditional that year at least up until you get the full tax credit. I know a lot of the people on this forum are excited for the Tesla Model 3, so figured I'd put this out there even though I think it would be 1000 times smarter to buy a used Nissan Leaf.

TheGrimSqueaker

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #13 on: February 02, 2016, 02:47:07 PM »
In "The Millionaire Next Door", which has its share of problems with statistics and logic, one thing Stanley and Danko noticed was that affluent people didn't tend to be in significant debt for homes or vehicles. One of the metrics they extracted was that people should never owe more than twice their gross income for a mortgage. Paying nearly that much for a car, which is a depreciating asset nearly all the time, seems to me to be doubly self-destructive.

This family is definitely going to face tough times because of buying this car. When will people learn to not take advice from lenders or salespeople about what they can or can't afford, though?

Paul der Krake

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #14 on: February 02, 2016, 03:11:05 PM »
Hold on a second. Are we talking about that $28,000 being total income (1040 line 22), AGI (1040 line 37), or taxable income (1040 line 43)? If it's total income, then yeah, she's an idiot. But if it's AGI or taxable income and she's got a whole bunch of other credits that reduce her liability to less than $7500 before this one kicks in, then that's more reasonable.

(Who am I kidding? It's probably total income...)
For all we know they may be a family of four with the two parents maxing two 401(k), two 403(b), two tIRAs, the family HSA (via payroll deduction of course), all the while charging their volt via solar panels they built themselves!

They would be the uncontested champions of the Mustachian Problems thread.

Jeremy E.

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #15 on: February 03, 2016, 12:16:21 PM »
Hold on a second. Are we talking about that $28,000 being total income (1040 line 22), AGI (1040 line 37), or taxable income (1040 line 43)? If it's total income, then yeah, she's an idiot. But if it's AGI or taxable income and she's got a whole bunch of other credits that reduce her liability to less than $7500 before this one kicks in, then that's more reasonable.

(Who am I kidding? It's probably total income...)
For all we know they may be a family of four with the two parents maxing two 401(k), two 403(b), two tIRAs, the family HSA (via payroll deduction of course), all the while charging their volt via solar panels they built themselves!

They would be the uncontested champions of the Mustachian Problems thread.
I'm guessing most people that fit this criteria would know how a tax credit works

Syonyk

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #16 on: February 05, 2016, 05:09:31 PM »
Subprime car lending is a huge thing now. They are giving loans to anyone that can fog a mirror.

Yup!  You can sell a car, collect the fees, repo it a few months later, and do this for years with just one car! :D

frugalnacho

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Re: Buying a $43,000 Car With a $28,000 income
« Reply #17 on: February 09, 2016, 10:55:14 AM »
Hold on a second. Are we talking about that $28,000 being total income (1040 line 22), AGI (1040 line 37), or taxable income (1040 line 43)? If it's total income, then yeah, she's an idiot. But if it's AGI or taxable income and she's got a whole bunch of other credits that reduce her liability to less than $7500 before this one kicks in, then that's more reasonable.

(Who am I kidding? It's probably total income...)
For all we know they may be a family of four with the two parents maxing two 401(k), two 403(b), two tIRAs, the family HSA (via payroll deduction of course), all the while charging their volt via solar panels they built themselves!

They would be the uncontested champions of the Mustachian Problems thread.

Couldn't they convert a large chunk of tIRA -> Roth to realize a bunch of income?  At least enough to eat up the non refundable credit?  Seems like they would have a nice silver lining in the whole debacle.

Can't they do that still even if they aren't mustachian? Unless they don't have a significant amount in their tIRA, in which case please deliver a face a punch to them from me.