The Fiscal Cliff Deal: What Car Buyers Need to Know

The Fiscal Cliff Deal: What Car Buyers Need to Know

Just the Facts:
  • Thanks to the law just passed, most people won't see their income tax rates rise.
  • But a payroll tax holiday has come to an end, meaning the average household will see about $820 less in its paycheck each year. For some, that's a couple of car payments.
  • The crises aren't over, but if your financial house is in order, 2013 is likely to offer a better economic environment for car-buying than any post-recession year to date.

SANTA MONICA, California — There are 147 pages in the American Taxpayer Relief Act of 2012. To save you wading through them all in search of what the measure means for you as a car-shopper, Edmunds chief economist, Lacey Plache, has picked out the issues that most affect car shoppers and car buyers and answered some common questions about them.

I heard that some people's income tax rates went up under the new law. Does this mean me? Will it mean I won't have money for a new car?

The fiscal cliff legislation extended the current rates for all taxpayers — except individuals earning more than $400,000 and households earning more than $450,000. Their rates will rise. The vast majority of taxpayers will continue to pay the same federal income tax rates that they had been paying. Also, the deal extended the current tax rates "permanently" — meaning that rates are unlikely to rise in the foreseeable future.

Are we still on a payroll tax "holiday"?

Unfortunately, no. The payroll tax that finances Social Security will return this year to 6.2 percent (on all earned income up to $113,700), after being temporarily reduced for two years to 4.2 percent. For the average American household earning $41,000 per year, this translates to lower paychecks: $16 less per week, or $820 less per year.

What's happening to tax credits for families? Can I still get a credit for my children? What about their daycare and college tuition? Without those, it's going to be tough to budget for a new car — or a lot of other expenses.

Parents can breathe a bit easier. The deal extends several key tax credits, including the American Opportunity Tax Credit, which can be claimed for college-related expenses, the Child Tax Credit and the Earned Income Tax Credit, which is a refundable federal income tax credit for low-to-moderate income working Americans. These tax credits each were extended for five years. Another tax credit, the Child and Dependent Care Tax Credit, was extended permanently.

My company — and my job — depend on government defense contracts. Is defense spending safe from cuts?

Not yet. The fiscal cliff deal pushed back the effective date for the legislated automatic federal spending cuts (known as "sequestration") from January 1 until March 1, allowing lawmakers additional time to negotiate a more palatable deal on spending cuts. At this point, no decisions have been made regarding spending, but defense spending remains a key target and the budgets of most government agencies and programs are at risk as well. As a result, government spending cuts could affect many companies that do business with the government, extending well beyond the defense industry.

Is there anything in the deal that would be likely to drive up car-loan interest rates?

No. Interest rates, which are currently at historic lows, should not be affected by the deal. The Federal Reserve has repeatedly pledged to keep interest rates low until at least the end of 2014.

Did this deal settle all of the government's fiscal issues so that we won't have any more of these crises? Can I relax now and plan my finances — including getting a new car after not buying one in six years?

There is nothing certain but death and taxes — and now, apparently, fiscal crises. The eleventh-hour deal failed to resolve several key issues, such as the debt ceiling limit and legislated automatic spending cuts to reduce the federal budget deficit. Rather, the deal pushed back decisions on these issues until the end of February at the earliest. And if recent history is any indicator, that means we're practically assured of at least one additional crisis.

Even worse, Congress and the Obama Administration made little progress toward resolving the vast discrepancy between government revenue and spending — by making key long-term changes to the tax code and to spending on entitlement programs, for example. As a result, our out-of-control budget deficits will plague us for years to come.

So if your car purchase hinges on the federal government having its financial house in order, don't start shopping just yet. But most car buyers shouldn't need to wait. The good news is that the deal decreased the risk of a recession in 2013 and economic growth is expected to continue. Despite the risk of additional fiscal crises, it is also possible that at least some progress toward resolving the government's fiscal issues will be made this year, which will only improve the economic outlook.

So for car buyers whose personal financial houses are in order, 2013 is likely to offer a better economic environment for car-buying than any post-recession year to date.

I heard that Congress was going to give itself a pay raise. Will they really get money that they could spend on things like new cars when so many Americans haven't had a raise in years?

Rest easy. Congressional salaries remain frozen, although legislators were only looking at a 0.5 percent pay increase. That's about $900 a year. It would have been hard to stretch that into a down payment.

Edmunds says: Our economy is not out of the woods yet, but prudent consumers don't have to worry about the fiscal-cliff measures putting a crimp in their ability to buy the cars they need and want.

Leave a Comment