Ep. 154 | New Automobile Interest Deductions
Download MP3Hey everybody, and welcome back to the Teaching Tax Full podcast episode 154 today. We are revving up for a very interesting topic. You'll see what I'm talking about here in a moment as we look at the new automobile interest deductions. So before we do that, as always, let's take a brief moment and thank our episode sponsor.
Ad Read:This episode is sponsored by Wealth Builders Mortgage Group, powered by Movement Mortgage, one of the top mortgage teams in the nation and a powerhouse in the real estate investing world. With over $1,100,000,000 in closed mortgage volume and more than 3,000 investor deals under their belt, they don't just talk the talk, they walk it. Their team specializes in helping short term and long term rental investors scale smart with customized lending strategies. They offer all STR loan products, including second home, investment, non QM, bank statement, asset based, and HELOCs. They also offer all primary home loan products too. Whether you're just starting out or expanding an existing portfolio, their unique Path of 10 strategy is designed to help you move from a nine to five job to financial independence. If you're looking for a lending partner who truly understands the investor mindset, visit wealthbuildersmortgagegroup.com and start building your roadmap today.
John Tripolsky:Hey, everybody. Hopefully, my corny little intro there did not turn you off about revving up for this wonderful topic. So, obviously, you heard it. What we're gonna talk about here. Being a car guy, I absolutely love this.
John Tripolsky:I'd love to see how this is actually gonna tie in to everything that we're talking about here at teaching tax one, especially on the podcast. But the good thing about this one is I didn't have to bring a guest. I brought my cohost, Chris Pacquero. How's it going, brother? Let's talk about this.
Chris Picciurro, CPA:It's going great. I know we're both from the Motor City. Now you're more of a car guy than I am. I'm so, so I'm I'm really excited that you're excited about this, and it's something, you know, a lot of times when tax laws are getting bandied about in the tax professional world, we could see things coming. But, gosh, this one, I didn't see coming.
Chris Picciurro, CPA:You know, not that it came out of nowhere. It was just, wow. Okay. And this tax law change was part of our friend o b three or the one big beautiful bill act. And what, we always say that tax laws are written to encourage and discourage certain behavior.
Chris Picciurro, CPA:So automobile auto ah, automobile loan interest deduction. So shocking I couldn't get it out of my mouth. There's now a deduction on a personal tax return for qualified automobile loan interest. And, obviously, this is to to the benefit indirectly of automobile manufacturers. And, and when we dive into what the qualifications are, I think you could read you could read through this bill and understand one of the laws of teaching tax flow, like I just said.
Chris Picciurro, CPA:The tax agencies are your involuntary business partner. So laws are gonna encourage and discourage certain social economic, behavior, and this is one of them. So part of that one big beautiful bill act, you might be able to take an interest deduction for an automobile that you've purchased on your tax return. And here's the interesting thing, John. It's not even an itemized deduction.
Chris Picciurro, CPA:Remember, itemized deductions are reported on schedule a, and you have to have all of your itemized deductions exceed the standard deduction for them to really matter. This is what we call an above the line deduction, meaning, it is coming off of your tax bill before your adjusted gross income is is is fully calculated.
John Tripolsky:So And this and, honestly, this news, I think, is gonna impact a lot of people. I think the awareness of it is probably gonna be the biggest challenge. Right? Like, a lot of people don't know that. And, I mean, if you think about it too.
John Tripolsky:Right? Like and, again, this come from somebody who's a car guy. You know, I I think I trigger every single auto automotive related Facebook ad on the planet. Right? I kinda feel like the the low interest rates on vehicles have kinda taken a little bit of a die.
John Tripolsky:You know, you don't see them as much. I know they're still there. But, I mean, just just think about that offset. Right? I mean and I would love to dive into this just a little bit.
John Tripolsky:I know there's some good example case studies maybe we can go through in defining this a little bit, but I'm glad that you did mention that regarding the difference, you know, the above and below the line too because that's a huge thing. And we talked about that, you know, just last week.
Chris Picciurro, CPA:Yes. Above and below the line, and you want definitely wanna be above the line. So that reduces your AGI. So let's talk about the deduction itself. The limit is gonna be $10,000 of qualified auto loan interest deduction per year.
Chris Picciurro, CPA:Now it has to be linked to a qualified vehicle. So what does that mean? It has to be a new vehicle, meaning it's the first use begins with the taxpayer. It has to be a vehicle that was final assembly within The United States. The gross vehicle weight rating has to be under 14,000 pounds, so we're not talking about most vehicles are under 14,000 pounds, so we're not talking about these big vehicles.
Chris Picciurro, CPA:It has to be personal use only, so it cannot be a business vehicle. Now there are so there's no, like, double dipping, John. Like, if you buy a purse a business vehicle and you take advantage of bonus depreciation or section one seventy nine, this is different. This is for individuals. So this is for people.
Chris Picciurro, CPA:We talk all the time that there are ton of deductions for business owners and rental property owners, but for people that are primarily employees or receive a w two, there are a ton of deductions. This is this is one of them. And it has to be secured by an auto loan, not a lease. So leased vehicles are not, eligible for this deduction. So which vehicles are not eligible?
Chris Picciurro, CPA:Used vehicles, leased vehicles, business use vehicles, fleet vehicles, and then any vehicle assembly assembled. A seven called outside
John Tripolsky:what you meant.
Chris Picciurro, CPA:Of The US Of A.
John Tripolsky:And a lot of that makes sense. I mean and I'm glad you mentioned that too. You know? That kind of alleviates the the double dipping opportunity. You know?
John Tripolsky:It's not like you're you know, I'm I'm just you know what? I'm gonna leave every analogy and come up with out of it because it's just gonna come out bad. I'm gonna roll this week, though. I think I'm on some really good, bad dad jokes, but I'll leave them out. And it's interesting that they put 14,000 pounds in there for a personal vehicle.
Chris Picciurro, CPA:Mhmm.
John Tripolsky:That gross vehicle weight because I mean, I got some friends that drive pretty large vehicles, and we're nowhere near 14,000 pounds. So I would love to see what guys drive around a 13,000 pound gross vehicle vehicle for personal use would be interesting. So I wonder if, like so what if somebody has a vehicle? This is a dumb question. You might just tell me to shut up and leave it the leave in the can.
John Tripolsky:Mhmm. Would it make sense? Or do you think some people are they might start selling you know, say they're in a their business. Would they sell themselves their vehicle? Could that in a sense be a double like, I mean, like, think about, like, if you're a c I don't know.
John Tripolsky:C corp or something like that. Okay.
Chris Picciurro, CPA:No. I mean, because remember
John Tripolsky:dumb ones out there.
Chris Picciurro, CPA:Yeah. That was pretty dumb, but we appreciate I don't think I've ever said your question was dumb. I'm usually kinder. But I appreciate that. Wait.
Chris Picciurro, CPA:No. That's an because remember, it's gotta be a but, actually, it's not a terrible it's not a terrible question because that's my piece. People are always looking for creative ways to to to do things.
John Tripolsky:And that's what I'm thinking about. Like, can you skirt around this?
Chris Picciurro, CPA:But That doesn't that no. Because remember, it to be a new vehicle.
John Tripolsky:Oh, that's right.
Chris Picciurro, CPA:Or can't be a used vehicle.
John Tripolsky:You're right. Okay. Yes. That's basically This is coming from a direct from the manufacturer's floor plan. Well, it's not really the manufacturer's floor plan, but that's a whole other thing.
John Tripolsky:You're buying a new vehicle assembled in The States, final assembly in The States, and secured by law. Makes sense.
Chris Picciurro, CPA:Right. Right. Okay. Now what are the loan requirements? The loan requirement must be a secured loan issued after 12/31/2024.
Chris Picciurro, CPA:So we're talking about two thousand twenty twenty five vehicles And you are right. Almost every vehicle is under 14,000 pounds gross vehicle weight rating. You know, most personal use vehicles. But they had to put something in there. Right?
Chris Picciurro, CPA:Maybe someone's trying to drive a a tank around as a as a
John Tripolsky:as a person. By that, and, I mean, I don't think we know the answer to this unless we've really read into it. Right? So we're just gonna say it, we probably don't have a response. But, you know, I imagine by them stating that it needs to be a secured loan to that vehicle, I'm sure it has to be a vehicle loan.
John Tripolsky:It's not like you can oh, I I got a HELOC, and I'm gonna go buy a vehicle with it, and I'm gonna write off that interest rate. That's probably they're probably trying to avoid that. But, again, I we'd have to look into it. I'm sure Correct.
Chris Picciurro, CPA:Now if you have a HELOC and you have you can use it for home equity improvements and stuff, yeah, then it's deductible.
John Tripolsky:But Right.
Chris Picciurro, CPA:But not
John Tripolsky:to go buy a not to go buy a Ferrari without telling your wife you're buying a Ferrari and promising you're you're gonna build the addition on the house.
Chris Picciurro, CPA:Well, right. And then so here it's Now that's a good segue because there are phase out thresholds. So I'll take it. Your deduction so this deduction is eligible, but it phases out. Meaning, if you go over a certain income threshold, you start to lose the full deduction.
Chris Picciurro, CPA:Those phase outs start for married filing joint at $200,000. So not I would imagine not too many people are buying Ferraris if they don't make at least $200,000 a year. And if they do, they're gonna be in the second category of single phase out of a $100,000 pretty damn soon.
John Tripolsky:Oh, I see. Third category of just being a financial idiot. But
Chris Picciurro, CPA:But yeah. So single and head of household, if you have over a $100,000 of of adjusted gross income or modified adjusted gross income, then you don't lose the deduction, but it begins to phase out. $200,000 for married filing jointly. So that's kind of the trick tricky part of, you know, are you gonna even be eligible for this based on income? Now phase outs can be very, very confusing.
Chris Picciurro, CPA:So one of the things that we we've really taken a lot of feedback, positive feedback within our defeating taxes private Facebook group. Shameless plug. Just go to defeatingtaxes.com to join. Thanks. Use more examples.
Chris Picciurro, CPA:So we actually have a few case studies, for for that we're gonna talk about on this podcast episode. Now what's the phase out formula? The deduction, remember, it maxes at $10,000, is reduced by $200 for every thousand dollars over the threshold. So if you're at anything over 200,000 married joint, every thousand year over, you lose a deduction of $200. Now this is why it's so important.
Chris Picciurro, CPA:Remember, your number one KPI, key performance indicator in tax planning and strategy is your marginal tax rate, not your tax bracket. Because your tax bracket's not gonna calculate these type of phase outs properly. But a marginal tax rate will. We're gonna run through three we're gonna run through three, three case studies, Johnny team.
John Tripolsky:And here's here's a question for you, semi related to this too. So, you know, I feel like we've been mentioning and bringing up the term phase out a lot more in the past six, eight months than we did previously. Has do you do you find that you know, I mean, you've been practicing for a couple decades now, and then some It's like a long time when you say it that way. Hey. I didn't I didn't say you've been practicing forever.
John Tripolsky:I just said for a long It just makes
Chris Picciurro, CPA:you a little over a score. A little over a score? Years?
John Tripolsky:I believe so. Four score and seven year. Yeah. K. Is are phase outs relatively new in the, the tax dictionary, we should say?
John Tripolsky:I mean, is there all have they always been so prevalent, say, ten, fifteen years ago, or is it kind of a newer thing?
Chris Picciurro, CPA:I mean, I think there's more awareness of phase outs. I feel like there are more of them. I mean, what's interesting is remember, tax tax laws are written in encouraging discursion behavior. What do phase outs tell us? Phase outs tell us what the federal government feels is a high amount of income.
Chris Picciurro, CPA:Because if you're over a $100,000 and you're single or head of household, basically, they're saying, you don't get this full deduction. We feel like you don't need it. Doesn't mean you don't deserve it, but you don't need it at your income level.
John Tripolsky:And I always think about this too. If anybody else is listening, this kinda feels the same way you know, in in my mind, the crazy world of everything that's going on up there. You know, I I picture, quote, unquote, filing, air quotes, filing taxes back, you know, the fifties, forties, long time ago, before we were around. I I in my mind, I almost see that as, like, Pleasantville. Right?
John Tripolsky:Like, oh, form? Check. Check. Check. Mhmm.
John Tripolsky:Attach something. Staple it. Send it off. Right? Like, now there's so many things.
John Tripolsky:Like, we mentioned phase outs and all the stuff, different stuff. It's like tax planning, which we always talk about, is really that's like the beacon of everything. Like, if you ever wanna have control and, you know, sticking it to the, you know, whatever, you come up with your own term, out there with having to shell out so much, like, get into it. And we got tons of content on that. So if anybody's interested in that, check that out.
John Tripolsky:Just Google tax planning, teaching tax while you find a million things.
Chris Picciurro, CPA:And the thing to consider about phase outs is these are federal phase outs. States have different conformity. Again, not to keep plugging defeating taxes, but we have a lot of some we've been talking about that in in our private Facebook group a little bit. However, the phase out think about a $100,000 for a single or head of household person. They start getting phased out of this deduction.
Chris Picciurro, CPA:Okay? Deduction could be significant. Now if you make a $100,000, should you be paying $20,000 a year of automobile interest? Probably not, but you don't you never know. That's modified adjusted gross income.
Chris Picciurro, CPA:What if you make 200,000, but it's all rental income and you get a bunch of depreciation deduction? Here's another thought, John. A $100,000 in rural Mississippi of income or a small town goes a lot or college town, let's say, goes a lot farther than Silicon Valley. Right? So it it's someone could be barely making it in one place and living in a completely different lifestyle than the other.
Chris Picciurro, CPA:So, just a thought.
John Tripolsky:We should do a whole other episode on tax planning and residency planning and have it sponsored by real estate agency. That's nationwide. We'll move everybody.
Chris Picciurro, CPA:We're working on that.
John Tripolsky:We'll move everybody from California over to the East.
Chris Picciurro, CPA:That sounds like a good plan.
John Tripolsky:I digress.
Chris Picciurro, CPA:So let's look at we're gonna do three case studies. Let's first talk about Emma. She's single, seemingly looking to mingle. She's got a good job. She got makes $90,000 of income.
Chris Picciurro, CPA:Her modified adjusted gross income is 90,000. She bought a new vehicle. It's a qualified vehicle, so it's it's it was assembled in The US, and it the final assembly was in The US. So could a vehicle maybe not be first they go doesn't mean every part has to be from The US. Final assemblies in The US, personal use, new vehicle.
Chris Picciurro, CPA:She had $2,800 worth of vehicle interest. Now interesting thought. Are these companies now loan come these these lending lenders, are they going to report this? So we're gonna keep our eyes out there for new tax forms. Or is this gonna be because the IRS doesn't want everyone to just claim those interest deduction without it getting reported to them.
Chris Picciurro, CPA:Like, mortgage interest is reported, you know, to the IRS. Yeah. So, anyway point. So deduction at $2,800. She's under the $100,000 limit.
Chris Picciurro, CPA:The $2,800 the $100 of interest paid is under the $10,000 maximum deduction. Emma is happy with her new vehicle. She's hot to trot on the town as she enters the dating scene, and she drives around in confidence knowing that she got a 2,800 deduction.
John Tripolsky:As long as her tax professional knows about this.
Chris Picciurro, CPA:So Exactly. Yes. Now we've got Marcus. Marcus is a head of household. So head of household means he's he's single.
Chris Picciurro, CPA:However, he does have qualified dependent. He's modified adjusted gross income's 95,000, and he paid $93,500 worth of interest. So let's think about this. Head of household. Okay?
Chris Picciurro, CPA:Magi? What's oh, acronym. John, you've killing it on those that's thank you. Yes. You've been killing it on the on that.
Chris Picciurro, CPA:But the Magi is our acronym for tax you know, in the tax world. But, but he'll get the under a 100,000, interest paid, 3,500 fully deductible. Marcus is happy. Final case study, Olivia. Olivia is also single.
Chris Picciurro, CPA:Olivia is doing well for herself. She's making a $140,000, but Olivia wants one of those nice whips. So she has $10,800 worth of mortgage interest paid. Oh, she did buy US made luxury vehicle, so the so the vehicle actually qualifies. But let's talk about two things with Olivia.
Chris Picciurro, CPA:First of all, hey, girl. She's single, making a $140. I don't know about allocating that many resources to a vehicle, but we ain't her financial adviser. We we we encourage Olivia to jump into the defeating taxes private Facebook group, though. Anyway, her modified adjusted gross income is $1.40, so she's over that $100,000 threshold.
Chris Picciurro, CPA:And the interest is $10,800, which is over the $10,000 limit. So we've got a couple things going on. Let's first talk about the the maximum deduction. The maximum deduction is gonna be $10,000. So the fact that she paid 10,800 is 8 that 800 the additional 800 is not gonna be deductible at all.
Chris Picciurro, CPA:Her MAGI is $1.40. It's $40,000 over the threshold. Remember, we said for every thousand, you lose $200 of deduction. So she's 40 over. 40 times $200 is an $800,000 phase out.
Chris Picciurro, CPA:I know that's tricky. So her maximum deduction would be the $10,000 of mortgage interest paid or mortgage interest, car loan interest paid. Remember, she was at ten eight, but she only gets credit for 10 minus the phase out of $2,000. So if she's in a 32% marginal tax rate, she saves $640. However, Marcus, if he's in a 22% marginal tax rate, he actually saves $770.
Chris Picciurro, CPA:So Marcus saves more money than Olivia but pays a third less loan interest because of his income. Isn't that interesting?
John Tripolsky:No problem. Do have to go back. You know, I made the Ferrari reference since they're made in Italy. Does not qualify. It would not qualify for this at all.
John Tripolsky:And on I did just look this up, and I believe I believe it's on moneygeek. I don't wanna quote moneygeek.com. I don't wanna quote it a 100% because I don't know where my quick Google search is actually pulling this from. But just so everybody knows, if you're if you haven't been in the the auto new auto market here in a while, and this is not this is just in general, not for US manufacturer, but they're about 50,000. Comes up 49,000 and some changes, the average new vehicle price.
John Tripolsky:So, you know, even at a low interest rate, that's significant savings if somebody qualifies and checks all those boxes. Right?
Chris Picciurro, CPA:That's nailed it. So, here's the thing, cash flow versus tax flow. Not everyone, everyone's situation is unique. What we hear, what we see is saying, dollars $10.00 a mortgage of, I keep saying mortgage interest because I'm just so used to that, right? Automobile interest, yes, that's the maximum but be cognizant of filing status, modified adjusted gross income, and how much you paid and then that calculates your tax savings.
John Tripolsky:I love it. I love it. And this was a good one. Again, that we dove into. I know there's a lot of interest on some of the reels that we've put out there on YouTube.
John Tripolsky:So everybody check those out. There's a lot of them. 600 plus videos now. Just bragging on ourselves. And I'm hardly in any of them.
John Tripolsky:So it's good. It's mostly this handsome gentleman that's in it. And to kinda give you a little bit of a preview too before we let you go, I'm looking on our list of our roster of other topics we're gonna talk about, Chris, and and in no order, really, because our schedule on these changes. But looking, you know, over the next month, month and a half, we're getting some pretty good stuff, man. So we're looking back, and not looking back, technically, at the IRS data book that they put out every year.
John Tripolsky:We're gonna dive deep into some numbers, some follow the facts that they usually put out. We're getting into material participation, what that means with somebody good for the real estate investors out there. We're also gonna get into the one fun one I know that I can raise Chris's blood pressure on somehow or another. I will find that way again. We're gonna talk about LLCs.
John Tripolsky:We're gonna talk about Good job. Forming them.
Chris Picciurro, CPA:I look forward to it, and, I wanna thank everyone for joining us.
John Tripolsky:Absolutely. Absolutely. Again, everybody check out definitaxes.com. That's a private Facebook group. Chris had mentioned there a couple times and also the YouTube channel.
John Tripolsky:Check that out. Subscribe. Don't be lazy. And we'll see everybody back here again next week on the teaching tax flow podcast. Same place, different time, different day of the week, different date.
John Tripolsky:Same day of week, different date. Completely different topic here on the show. Tried to do it there, and I messed it up as bad as Chris saying. Assembly, assemble, and all that stuff. You get jumbled.
John Tripolsky:Have a good one.
Disclaimer:The content provided is educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney. Investment advisory services are offered through Cabin Advisors, a registered investment advisor. Securities are offered through Cabin Securities, a registered broker dealer.
Disclaimer:The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum.
