The original question in this thread had to do with the merits of putting money down on a truck or no money down (assuming it can be done in today's market). I presume (hopefully correctly) that the intent of the question was to ask about the tax advantages (or disadvantages) of writing off (deducting) the financing costs of a truck.
"Financing costs" means the costs of borrowing money for the purchase of a truck. It includes interest built into your truck payments, any loan origination fees, early loan payoff penalties, etc. Such costs are generally tax deductible.
As with most costs, before you deduct it, you must incur it. In other words, before you can deduct a dollar, you must spend a dollar. Therein lies the rub.
When you spend a dollar on your truck and deduct that dollar on your income tax form, the actual cash value of that deduction is nowhere near one dollar.
The deduction does not reduce your tax liability (the amount you owe the IRS) dollar for dollar. It reduces the amount of income your tax liability is calculated on.
Consider the following two examples. The numbers are over-simplified for illustration purposes. Things like personal exemptions, IRA contributions, etc. are intentionally excluded from the examples for simplicity sake.
Example 1:
Assume you are a single (as in unmarried) sole-proprietor and your gross income for a year is $50,000. That would put you in the 25% tax bracket (as per the federal income tax tables). Also assume you had no business expenses to deduct.
Per the tax tables, your tax liability would be $3,910 + 25% of the income amount over $28,400. In this case the income amount is $50,000. $50,000 - $28,400 is $21,600. 25% of $21,600 is $5,400. Thus, your tax liability in Example 1 would be $3,910 + $5,400, which totals $9,310.
Example 2
Assume everything is the same as Example 1, but also assume you have $1,000 of business expenses that you can deduct. For tax purposes, that would reduce your gross income from $50,000 to $49,000.
Per the tax tables, your tax liability would be $3,910 + 25% of the income amount ($49,000) over $28,400. $49,000 - $28,400 is $20,600. 25% of $20,600 is $5,150. Thus, your tax liability in Example 2 would be $3,910 + $5,150, which totals $9,060.
Notice the difference. In Example 1, you owe the IRS $9,310. In Example 2 you owe the IRS $9,060. The difference between the two is $9,310 - $9,060, or $250.
In other words, $1,000 of decuctible expenses provided a $250 tax liability reduction. Where you might have paid $1,000 for say a new security system for your truck, your actual out of pocket cost for the security system would be $750 once the tax deductibility of the security system is factored in.
Note that to derive that benefit, you had to spend $1,000 and the benefit itself was only worth $250. That leaves you with an actual out of pocket expense of $750. Of course you get the security system, which is a benefit, but it is not a tax benefit.
Now, assume the repair did not have to be made. That would put you back into the Example 1 scenerio since your deduction would disappear.
Remember, the difference in value between Example 1 and Example 2 is $250.
In Example 1 you earn $50,000, and pay $250 more to the IRS. In Example 2 you earn $50,000, spend $1,000 out of pocket on truck repair, and pay $250 less to the IRS because of the $1,000 deduction.
Example 1 leaves you with $750 in your pocket. Example 2 leaves you with $750 out of your pocket and new chrome.
The moral of the story is: Regarding taxes, it is better to save money and pay taxes on it than it is to spend money and deduct that spending to reduce your tax liability.
Back to the original question asked in this thread. Considering taxes only, it would be best to put as much down on the truck as you can.
Of course, there are always additional considerations.
Disclaimer: I am not an accountant, CPA, or professional tax advisor of any kind. The only thing I'm licensed to do professionally these days is drive a truck. Consult qualified tax professionals for tax advice.
"Financing costs" means the costs of borrowing money for the purchase of a truck. It includes interest built into your truck payments, any loan origination fees, early loan payoff penalties, etc. Such costs are generally tax deductible.
As with most costs, before you deduct it, you must incur it. In other words, before you can deduct a dollar, you must spend a dollar. Therein lies the rub.
When you spend a dollar on your truck and deduct that dollar on your income tax form, the actual cash value of that deduction is nowhere near one dollar.
The deduction does not reduce your tax liability (the amount you owe the IRS) dollar for dollar. It reduces the amount of income your tax liability is calculated on.
Consider the following two examples. The numbers are over-simplified for illustration purposes. Things like personal exemptions, IRA contributions, etc. are intentionally excluded from the examples for simplicity sake.
Example 1:
Assume you are a single (as in unmarried) sole-proprietor and your gross income for a year is $50,000. That would put you in the 25% tax bracket (as per the federal income tax tables). Also assume you had no business expenses to deduct.
Per the tax tables, your tax liability would be $3,910 + 25% of the income amount over $28,400. In this case the income amount is $50,000. $50,000 - $28,400 is $21,600. 25% of $21,600 is $5,400. Thus, your tax liability in Example 1 would be $3,910 + $5,400, which totals $9,310.
Example 2
Assume everything is the same as Example 1, but also assume you have $1,000 of business expenses that you can deduct. For tax purposes, that would reduce your gross income from $50,000 to $49,000.
Per the tax tables, your tax liability would be $3,910 + 25% of the income amount ($49,000) over $28,400. $49,000 - $28,400 is $20,600. 25% of $20,600 is $5,150. Thus, your tax liability in Example 2 would be $3,910 + $5,150, which totals $9,060.
Notice the difference. In Example 1, you owe the IRS $9,310. In Example 2 you owe the IRS $9,060. The difference between the two is $9,310 - $9,060, or $250.
In other words, $1,000 of decuctible expenses provided a $250 tax liability reduction. Where you might have paid $1,000 for say a new security system for your truck, your actual out of pocket cost for the security system would be $750 once the tax deductibility of the security system is factored in.
Note that to derive that benefit, you had to spend $1,000 and the benefit itself was only worth $250. That leaves you with an actual out of pocket expense of $750. Of course you get the security system, which is a benefit, but it is not a tax benefit.
Now, assume the repair did not have to be made. That would put you back into the Example 1 scenerio since your deduction would disappear.
Remember, the difference in value between Example 1 and Example 2 is $250.
In Example 1 you earn $50,000, and pay $250 more to the IRS. In Example 2 you earn $50,000, spend $1,000 out of pocket on truck repair, and pay $250 less to the IRS because of the $1,000 deduction.
Example 1 leaves you with $750 in your pocket. Example 2 leaves you with $750 out of your pocket and new chrome.
The moral of the story is: Regarding taxes, it is better to save money and pay taxes on it than it is to spend money and deduct that spending to reduce your tax liability.
Back to the original question asked in this thread. Considering taxes only, it would be best to put as much down on the truck as you can.
Of course, there are always additional considerations.
Disclaimer: I am not an accountant, CPA, or professional tax advisor of any kind. The only thing I'm licensed to do professionally these days is drive a truck. Consult qualified tax professionals for tax advice.