Tax season can be a source of dread or joy, depending on how you manage your withholdings. If you’re self-employed, you will likely owe Uncle Sam a nice chunk of change. However, for most taxpayers, late winter and early spring present an opportunity to access a forced savings account. It’s probably the only one you keep that, for better or worse, never manages to pay you any interest.
The IRS estimates the average U.S. tax return jumped more than 11% for the 2021 filing season. Up to $2,775 from $2,495 the previous year, this figure can make a substantial difference in helping you purchase your automobile. And while money in hand like this may seem like a windfall, remember that it is still income you earned, so invest these funds wisely and with care. After all, it’s your money.
With that in mind, here are four useful tips for purchasing a used vehicle with your income return this tax season.
1. Use Your Tax Refund for a Down Payment and Help With Out-of-Pocket Expenses
For several reasons we’ll discuss, the tax season is an ideal time to acquire a used vehicle. If you’re fortunate enough to get a large tax refund, investing that money into a quality used vehicle is always a wise choice. As you start your search, you’ll quickly encounter a variety of dealers with attractive used car options on offer. A successful hunt always leads to a reliable car at a low cost after a hassle-free buying process.
If you received a big tax return this year, the first step is to establish your budget. Once you’ve identified this plan, divide your refund by the number of payments you expect to make over the course of the entire loan. This number provides you with a real-world picture of how much your income tax return impacts the overall deal.
Approaching potential negotiations this way helps you stick to your original budget and plan. Your income return is a great way to reduce out-of-pocket expenses and fees in a used vehicle purchase, but it may not be enough to get the low monthly payment you were expecting. Establishing a few guidelines and researching the most cost-efficient vehicles beforehand goes a long way to ensuring that you stay on budget.
It is worth noting, as well, that you should wait until you have your return in hand before making any purchase decisions. This is especially the case if you are still in the early planning stages of selecting your next previously owned car or truck.
Even if you feel like you have enough money saved to complete the entire deal, never count on receiving your estimated return until it actually lands in your account. Delayed returns are common. Alternately, the IRS may surprise you with another lesser calculation. These days, you simply never know. Approach the process with caution, and always remember Murphy’s Law, and you’ll come out ahead.
2. Capitalize Tax Season Incentives and Sales Specials
Dealerships are fully aware that tax season is an optimal time to buy a used car for most people. Buyers in this segment usually get money back from a tax refund. As such, you should expect a diverse range of appealing used car buying opportunities to arise in late winter and early spring. Dealers count on this time of year to increase their sales, and they do everything in their power to capitalize on this opportunity. They’re not just marketing these seasonal incentives to buyers who’ve received large tax returns either.
Tax-themed sales events typically start late in the tax season. The reason for this is twofold: For starters, by most estimates, a majority of filers wait until April to complete their returns, even if the government owes them considerable money. Secondly, they want assurance that prospective buyers have had enough time to recapture those funds and get them in the bank. As mentioned, the deal is never done until it is closed and sealed, particularly when it comes to the IRS.
When searching for the best used car, not all dealerships are equal. Some lots are well-positioned to offer extraordinary tax season sales, and others are not.
As you are shopping for a used car, it’s important to draw this distinction. Is the dealer really offering a tax season sale? Or is this just their typical monthly incentive re-branded as an annual tax refund offer? Special seasonal offers stand out. Make sure you’re really getting the opportune discount that’s advertised.
3. Benefit From More Vehicle Choices During Tax Season
Of course, it’s hard to plan your next vehicle purchase with your tax refund if you’re unsure exactly how much you’re getting. One rule of thumb to follow is to never let yourself be tempted into using the refund to move into a higher-priced vehicle if the return ends up being more.
Luxury vehicles constitute only 18.4% of the overall market share. What does this mean? More consumers want practical transportation. High demand equates to fewer incentives.
Tax season, however, provides ample opportunity for you to find an unbeatable deal on the most reliable and fuel-efficient used cars that are in constant demand. The average price of a new vehicle has crossed into record territory, approaching nearly $50,000. Just a few years ago, this was the approximate cost to acquire an entry-level luxury vehicle.
With the cost of new cars so high, buyers must necessarily re-strategize. Common sense tells you that buying a new vehicle makes little economic sense when you can save thousands for essentially the same model with just a few more miles on the odometer. Modern used cars are more reliable now than they ever have been. Buying a gently used trade-in is one of the best financial decisions you can make.
4. Keep Within Your Budget
After buying a house, a car is typically the most expensive purchase you will ever make. According to most financial experts, too many buyers fall into the expensive mistake of becoming too fixated on the sticker price of their desired vehicle. That’s to stay, they often fail to weigh in the cost of overall ownership. It is well after the sale that most buyers start falling out of budget.
The way to factor this is simple. Let’s assume you make $60,000 a year. Take the estimated overall annual cost to own and to maintain the vehicle, which should be readily available. Make sure you look at multiple estimates from various sources, not just the manufacturer’s numbers. If this cost exceeds more than 10% of your gross annual income, or $6,000 a year, consider yourself out of budget.
Anything under that figure, and you’re in the safety zone. Even if you fall at the higher end of medium-income earners, a $50,000 auto loan is nothing to sneeze at. You really don’t want to end up spending 100% of your net salary on a brand-new make and model.
The Takeaway
A well-maintained used car can last you 200,000 miles or more, and investing your hard-earned tax refund into an asset like this is priceless.
