Super Tax Incentives
- posted by KLR
Wow – if you like incentives, tis the season. Cash for clunkers; First time homebuyers; Bonus depreciation; Energy credits. One of these is sure to get you stimulated.
Remember in my last post (Constantly Changing Tax Laws) I talked about how tax policy is often used as a means to social policy…..and I promised to cover super incentives next time. Well, the supers are here!!
We all know it’s nice to get a tax deduction for mortgage interest (subject to limits of course) or it’s nice to get a learning credit for spending on higher ed, but these probably aren’t big enough by themselves to make or break your decision to buy a house or go to college. Why? Because they are governmental tokens of affection and not a lot more than that. And, they are chump change compared to a super incentive like the homebuyer credit. Think about this: If you’re a first time homebuyer and closing before November 30, 2009, you can get a credit of $8,000 directly on your tax return -- and this credit is refundable, which means a check from the US Treasury. Still seems small? Did you know that an $8,000 tax credit is equivalent to a $40,000 deduction for most taxpayers? And, it gets better.
In the cash for clunkers program, you don’t even need to wait for a tax return. You don’t even need to file a thing. A payment of $4,500 can go directly to the auto dealer – no waiting. Now, $8,000 for the homebuyer sounded pretty good but when your buying a house, $8,000 doesn’t go far (it’s probably only 4-5% of the purchase price). A clunker rebate is closer to 25% of a car’s price tag. Who wouldn’t want that? Match that up with a few dealer incentives and the cars are flying off the lot.
How about going green? The federal government will give you a 30% tax credit towards the cost of adding alternative energy sources to your home – things like solar, wind, and geothermal. The best part -- there’s no limit to this credit. So, if you spent $50,000 on a wind turbine, you get a tax credit of $15,000 which can be used just like a tax payment on your personal return. It’s like someone is sending a payment to the IRS for you!
But we can’t leave out the business owner. Here is the granddaddy of all incentives -- bonus depreciation. It doesn’t sound fancy, but what it does is allow businesses who buy brand new furniture, fixtures, and equipment to deduct half the cost in the year of purchase. Under normal circumstances, a business is required to deduct these purchases over 7 years. Still doesn’t sound like much? How about this: MegaStore buys $10 million dollars of new store shelving in 2009. They get to bonus depreciate $5 million in 2009 alone – this saves MegaStore $2,000,000 in federal taxes! Under the normal rules, Mega would have saved $500,000. That’s an incentive of $1.5 million dollars. Wouldn’t you think it was super if someone lowered your tax bill by $1.5 million? It’s so good; the States don’t even allow it.
Now the hard part – someone has to pay for these jumbo credits and deductions. To see how that’s done, tune in next time when we’ll talk about disincentives.
Remember in my last post (Constantly Changing Tax Laws) I talked about how tax policy is often used as a means to social policy…..and I promised to cover super incentives next time. Well, the supers are here!!
We all know it’s nice to get a tax deduction for mortgage interest (subject to limits of course) or it’s nice to get a learning credit for spending on higher ed, but these probably aren’t big enough by themselves to make or break your decision to buy a house or go to college. Why? Because they are governmental tokens of affection and not a lot more than that. And, they are chump change compared to a super incentive like the homebuyer credit. Think about this: If you’re a first time homebuyer and closing before November 30, 2009, you can get a credit of $8,000 directly on your tax return -- and this credit is refundable, which means a check from the US Treasury. Still seems small? Did you know that an $8,000 tax credit is equivalent to a $40,000 deduction for most taxpayers? And, it gets better.
In the cash for clunkers program, you don’t even need to wait for a tax return. You don’t even need to file a thing. A payment of $4,500 can go directly to the auto dealer – no waiting. Now, $8,000 for the homebuyer sounded pretty good but when your buying a house, $8,000 doesn’t go far (it’s probably only 4-5% of the purchase price). A clunker rebate is closer to 25% of a car’s price tag. Who wouldn’t want that? Match that up with a few dealer incentives and the cars are flying off the lot.
How about going green? The federal government will give you a 30% tax credit towards the cost of adding alternative energy sources to your home – things like solar, wind, and geothermal. The best part -- there’s no limit to this credit. So, if you spent $50,000 on a wind turbine, you get a tax credit of $15,000 which can be used just like a tax payment on your personal return. It’s like someone is sending a payment to the IRS for you!
But we can’t leave out the business owner. Here is the granddaddy of all incentives -- bonus depreciation. It doesn’t sound fancy, but what it does is allow businesses who buy brand new furniture, fixtures, and equipment to deduct half the cost in the year of purchase. Under normal circumstances, a business is required to deduct these purchases over 7 years. Still doesn’t sound like much? How about this: MegaStore buys $10 million dollars of new store shelving in 2009. They get to bonus depreciate $5 million in 2009 alone – this saves MegaStore $2,000,000 in federal taxes! Under the normal rules, Mega would have saved $500,000. That’s an incentive of $1.5 million dollars. Wouldn’t you think it was super if someone lowered your tax bill by $1.5 million? It’s so good; the States don’t even allow it.
Now the hard part – someone has to pay for these jumbo credits and deductions. To see how that’s done, tune in next time when we’ll talk about disincentives.
By. Norman LeBlanc, CPA
Tax Services Group
Labels: Government Tax Credit, Green, IRS, KLR, LeBlanc
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2 Comments :
Have any studies ever been done to determine the true economic impact of all of these credits, not just a tally of the campaign contributions to the sponsoring legislators? Or, do the legislators just enact the next round of credits, and see what happens? I expect that some tax credits create more economic activity, and thus more tax revenue than they cost, while some tax credits are to promote social engineering without a care about the cost.
In any event, for the individuals and business that receive the credits, it appears to be a windfall and they should take advantage of them whenever possible.
Thanks for spreading the word about these credits.
In response to the impact studies - of course the GAO (Government Accoutability Office) does a budgetary forcast to see the "cost" of these credits before they become law; and there are a host of think tanks that analyze them in, out, up, down, and sideways. However, I don't know that anyone ever takes a backwards look and tests their true impact. I'd love to know that one myself.
Norman
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