We hear plenty of auto sales ads touting the benefits of increased depreciation as a great reason to buy a new car this week. Likewise, charities make a big year-end push this week promoting the tax benefits of charitable contributions.
I don’t want to be a spoil-sport and discourage anyone from buying a car or donating to charity. But please understand that tax benefits are not a significant reason to justify your decision.
First, the actual economic value of Section 179 deduction or bonus depreciation is only the time value of the faster depreciation that would have happened in a couple of years anyway. Here is the kicker: if you believe, as I do, that effective marginal tax rates will rise at a greater rate that current interest rates, then you actually stand to LOSE economic value (purchasing power) by taking advantage of the faster depreciation write-off now rather than later! (If you are not convinced, I have an accounting program that calculates and compares deals on auto purchase and lease options).
Second, we should recognize that the vast majority of donors to all types of charities do NOT get to deduct the contribution on their income tax return. The current system that encourages most filers to take a standard deduction and places to types of limits the amount that others can deduct for charitable contributions. So do it because of your big heart, but not for the tax savings.
Cheers and Happy New Year!