It’s Fix the Tax Code Friday!
Not too long ago, I answered an “ask the taxgirl” question about credit card interest on tax returns. It was surprising to hear that some folks still believed that personal interest was deductible – especially since it had been eliminated over 20 years ago. My fellow tax bloggers were similarly surprised, perhaps wondering if we’d been thrown back to the land of Hammer pants, shoulder pads, and leg warmers.
Like the recent return of those same Hammer pants, shoulder pads and leg warmers (please God, let it be a short and painless stay), personal interest deductions are now back in the news. Senator Mikulki has managed to push through what I think is an ill-advised tax break for new car loan interest as a potential piece of the new stimulus package. Is a return of personal interest deductions for credit cards next?
Weigh in.
Today’s Fix the Tax Code Friday question is:
Should we allow consumers to deduct personal interest (from personal loans, credit cards and more) on their tax returns?
From the point of view of a tax preparer looking for deductions, I remember fondly the days when all interest – auto loan, credit card, pension loan, personal loan, student loan, etc – was fully deductible on Schedule A. The deduction was done away with under Reagan.
Some clients have long memories, especially when it comes to reducing taxes. I am occasionally asked by a client with a huge jump in income if we can use Income Averaging .
However I personally do not believe the government should encourage credit card debt, or other kinds of personal debt, by providing a deduction for such personal interest. It is more than enough that home equity interest for borrowings for personal use is deductible. I also do not believe a special “dispensation” should be allowed for a particular industry.
I do believe that auto loan interest should be allowed as an employee business expense for those who use their car for business – to make the deduction comparable to that of a self-employed taxpayer who deducts auto expenses on Schedule C.
TWTP
Want to boost the economy? Cut taxes. Whether that is with additional or larger credits, more deductions or whatever. The bigger the refund the more folks will spend. If the consumer is responsbile for 70% of our GNP then simply give the consumer more money to spend. “Build it and they will come”. Giving it to the banks hasn’t seemed to help much (and that is such a big surprise), bailing out various different companies hasn’t worked real well either (another big surprise). So how about putting the money where the power is – the consumer. Or, another road to help the economy would be to audit each and every politician – it appears they may have a problem understanding the laws they wrote…..
I agree with Robert D Flach, the government should not encourage excessive credit card, and other personal, debt by allowing the deduction of interest on such loans. As to the possible deduction of interest on a new car loan, maybe; if, it’s one of those deductions with an expiration date. It might help stimulate the purchase of vehicles. But have it expire in 5 or 6 years, and be for Made in the USA cars only. Vehicles produced by foreign countries but made in a US plant would qualify.
Now that I have paid my non-mortgage debt down almost to zero, I say no — it won’t do me any good.
Seriously, I don’t think deducting non-mortgage interest will be much incentive to increase already “massive” credit card debt. It won’t be of any help to most families that now take the standard deduction. It probably won’t be much of an encouragement to buy a car, and won’t be much benefit to those who get low (or no) interest incentive financing. If the objective is to encourage car buying, how are we going to discriminate between those who would have bought a car anyway and those for whom the deduction of interest is the tipping point?
Made in USA is a good idea, but “qualifying” a car as made in USA would be a nightmare. Some Fords are made in Mexico; some Hondas are made in the US.
All in all, I think there are better ways to direct tax and spending stimuli toward job creation and stemmiung the tide of unemployment and housing market diusasters.
If they want to encourage cars sales pay the sales tax for us.
Although Reagan is not my favorite president — Lord knows over the years while I was working I had enough stuff “trickling down” on me (and it wasn’t money)–, I do have to say that eliminating the personal interest deduction was probably a good idea. Rewarding people for using their credit cards just doesn’t make sense. We should be rewarding savings. So how about temporarily suspending taxes on interest, dividends, and capital gains? We could index it by income if we’re worried about giving another tax break to the rich, but, personally, I think saving at all income levels is worth rewarding.
I was glad to read that this provision was removed. I planned on buying a car by the end of the year, but I was discouraged by this bill. I plan on paying cash, and I was insulted that somebody taking a loan could get such a better deal than me!
I think it is a great idea more of your income in your pocket , plus it might put pressure on card companies to lower interest rates on cards. And it would help a whole lot of people.
I agree that encouraging debt is NOT a good idea. But when the banks are jacking up rates on consumers to 25% or 30% or more, there HAS to be some kind of releif! Either nail the banks ass against these hikes or give people releif they need so they can handle the drastic changes to their credit.
On a side note – it’s a lot harder to have the same standard of living that our parents did. They did it on one income, but today the average family needs two incomes and STILL have to have credit cards to get by. It’s not just an issue of consumer excess – it’s also an economics issue that has snowballed America for the past 30 years.