Car allowance dilemma-Newer car or no

[mrsggrowsveg]

My husband started a new job a few months back and one of the benefits is a monthly car allowance and reimbursement of gas expenses.  The car allowance is $437 per month and $.21 per mile for gasoline.  We intended on using the car allowance as extra income and continue driving our current 2003 VW Jetta TDI.  The other employees all purchased newer vehicles and questioned his use of an old vehicle.  If the car used for business is newer than 5 years, there is no income tax on the car allowance.  For this reason, the majority of employees all drive a vehicle newer than 5 years old.  My question is, would it be worth it to upgrade to a newer car for the tax savings or should we continue to drive the TDI until it no longer runs?

[Chranstronaut]

I suppose the best way to answer this question is to pull up Excel and do a quick monthly cost comparison.  If you figure out the income tax + the monthly expense of the car you have now vs. just the monthly expense of a newer car, you'd have your answer. 

As an example, here is a set of numbers I did for myself to understand the hidden costs of car ownership:

2003 Ford Focus Wagon SE
Car Cost   $4,000.00      
MPG   32      
Gas Price/gal    $3.85      
Car life (years)   2      
Cost of 4 tires   $400.00      
Miles/week   130      
Yearly Registration and fees   $55.00   
Cost of Oil Change   $35.00   ($35 every 5,000 mi)
Car Insurance per year   $600.00   ($300 every 6 months   )
         
Expenses   Monthly Cost      
depreciation   $166.67 (assumed linear, actually depreciates faster when new and slower when old)
insurance   $50.00      
gas   $62.56      
maintenance   $20.00 (Wiper blades, light bulbs, and parts)
tires   $5.20
registration   $4.58      
oil changes   $3.64
total   $312.65

So my old car costs me a little over $300 a month if I assume I will only own it for 2 more years (this is probably really conservative)

I think another non-financial question you need to ask yourselves here is: do you really care that you don't have a nice new car like your husband's coworkers?  I guarantee most of them aren't 'staching...

[CarDude]

My husband started a new job a few months back and one of the benefits is a monthly car allowance and reimbursement of gas expenses.  The car allowance is $437 per month and $.21 per mile for gasoline.  We intended on using the car allowance as extra income and continue driving our current 2003 VW Jetta TDI.  The other employees all purchased newer vehicles and questioned his use of an old vehicle.  If the car used for business is newer than 5 years, there is no income tax on the car allowance.  For this reason, the majority of employees all drive a vehicle newer than 5 years old.  My question is, would it be worth it to upgrade to a newer car for the tax savings or should we continue to drive the TDI until it no longer runs?

In all but a few heavily subsidized cases, it's going to be cheaper to drive a used car than to buy a newer one for tax savings. Now, granted that you're driving a Volkswagen, the end might be sooner than you think, so I'd make sure at least some of that car allowance is going toward a yearly maintenance budget, if you don't already have one.

[Trirod]

If the car used for business is newer than 5 years, there is no income tax on the car allowance. 

Are you in the US?  If so, then there is no tax rule that a car allowance for a car newer than 5 years old is not subject to income tax.  I would be interested in hearing the basis for that assertion.

I agree with the others that, tax advantages or not, it still makes a ton more sense to keep driving the Jetta.

[FastStache]

I think you need to do the math, and you need to crunch it for yourself.

If what they say is true, you need to account for
1. What is your tax bracket?
2. What is the depreciation of a new car versus an older car?
3. Maintenanace of a newer car versus an older car?
4. Insurance difference on the cars?
5. Financing charges?
6. Gas mileage difference
Etc. you get the picture

But, I would be skeptical of the 5 year rule for a tax savings.

[Thegoblinchief]

2003 is old? Yeah, it's a VW but still!

I'd split the difference. Bank half the allowance as income, segregate half in cash or conservative investment account to cover an eventual replacement or repairs on the Jetta.

[mrsggrowsveg]

Apparently the company that provides this benefit had the tax rule, but we'll see how it plays out.  We looked at our tax bracket and did some math and it does not make sense to buy a newer vehicle at this time.  Thank you for the feedback, it gave us a lot to consider. 

[dandarc]

If the car used for business is newer than 5 years, there is no income tax on the car allowance. 

Are you in the US?  If so, then there is no tax rule that a car allowance for a car newer than 5 years old is not subject to income tax.  I would be interested in hearing the basis for that assertion.

I agree with the others that, tax advantages or not, it still makes a ton more sense to keep driving the Jetta.

I think that what has happened here is that the company has determined that a car newer than 5 years, combined with the usual business use of the vehicle clearly justifies the car allowance - on a car older than 5 years, the allowance could be construed as too much, (indeed, this is what the OP is trying to do here).

http://www.irs.gov/publications/p463/ch06.html

Back to the question, to decide whether it is worth it to buy a newer car, you'd have to look at your marginal tax rate to determine the tax savings, then decide if that is enough to cover the additional cost of the taxes - if you are in the 25% bracket, you save $109.25 per month from the fixed amount on taxes if you get a newer car, plus $.0525 per mile for the variable part.  If your husband's business use of the vehicle is 1000 miles per month on average, that's another $52.50. So in that scenario, you're getting an extra $161.75 per month from the tax savings by having a newer car.  Is that worth it?  Depends on the cost of the newer car.

My gut feeling is that you are probably better off buying older vehicles, and driving them into the ground and just paying the taxes - you could deduct your actual business mileage in this case (if you itemize), which might work out reasonably well on the taxes any way.  If you decide to go with the newer car route, either for financial reasons, or maybe to impress clients or whatever, you're probably better off getting something at least 1 or 2 years old than something brand new - cars depreciate very fast early on, particularly if you are putting a ton of miles on them as your husband might be doing here.  Then you'd probably have to buy a new car ever 4 or 3 years to stay under the 5 year cap, so this comes with that hassle as well.