 Pay
cash, tap home equity or get car loan?
|  Dear
Tax Talk,
My wife and I are about to purchase a
$40,000 car and we are trying to figure out the best way to deal with the finances.
The choices are some combination of cash, dealer loan, credit union loan and home
equity line.
We are subject to the alternative minimum
tax, so I am not so sure the home equity line of credit is a good move.
We were thinking of putting $20,000 down and
financing the rest through the dealer. While it may not be the best
rate, it is pennies away (in actuality) from other loans, and much
more convenient. Some people have been saying $20,000 down is too
much. Other people have been urging use of the home equity line
of credit, but I think the AMT will more than remove any benefit.
Any thoughts?
-- Craig
 Dear
Craig,
AMT is Congress's way of taking away all the
good tax benefits that make headlines. Originally intended to provide an alternative
taxing system so that the rich would not avoid taxes altogether, it now seems
that many upper-middle-income families are getting hit with AMT.
AMT is computed on Form
6251. You start to figure your AMT using your taxable income
after your itemized deductions but before your personal exemptions.
Then you have to add back into alternative-minimum taxable income
some itemized deductions such as miscellaneous deductions, taxes,
some medical expenses and an adjustment for mortgage interest.
You have to add back mortgage interest to the extent that
you've cashed out home equity for any purpose other than to buy your home or substantially
improve it. In your case, if you use the loan to buy the car, the interest on
the $20,000 would be added back for AMT, which means you would lose the tax benefit.
So whether you use the dealer financing or the home equity loan or HELOC, you
will not be getting any tax benefit from the interest paid.
You're probably earning interest on the money that
you will use as a down payment. The more that you pay down, the
better off you are since the interest on the debt is not deductible,
but the interest you earn is taxable.
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