Here’s a story about a little mental game I played while doing my taxes this year. I ended up doing something that might not make the most sense financially (that is, mathematically, it may not be the optimal choice), but felt like the right thing to do. Although we all do these things from time to time, it’s nice to be conscious of it even if we don’t intend to change it.
The Question
I bought a vehicle and 2012, and I use the vehicle in my business. As a result, it’s something that I can use as a business expense, which helps reduce my taxes. The question was how I want to depreciate the vehicle: did I want to use “accelerated” depreciation, or a standard depreciation schedule. With accelerated depreciation, the deduction in early years is larger, which means I would get more of a benefit today. The tradeoff, of course, is that I would get less of a benefit in future years.
Why wouldn’t I choose accelerated depreciation? I had a large expense last year, and a large deduction can help offset that expense. Furthermore, it’s generally better to receive a dollar today than to get a dollar tomorrow (the time value of money).
However, something was pulling me to just take the standard depreciation, which I believe will be for an equal amount every year (maybe it’s “straight-line” depreciation?). My hunch is that I will earn more income next year, so it might be nice to use some of that deduction against next year’s income. Again, does this make sense? Is there any guarantee that I will earn more next year? Not necessarily, but it felt more comfortable. Even if I was to get bumped up into a higher income tax bracket, the numbers still might point towards taking the deduction today. Certainly a change in tax rates would make a difference, but I have no idea how big that change would have to be for it to be a meaningful difference.
The Decision
Ultimately I decided to go with standard depreciation. For whatever reason, I wanted to have a series of larger deductions available (or “in my pocket”) for several future years. I guess if I was going to purchase vehicles frequently, my decision might have been different. But this feature of the tax code (the ability to take accelerated depreciation) wasn’t an incentive. I bought the vehicle simply because it was time to get a new one.
Did I make the wrong decision? Perhaps. But it felt like the right thing to do. If it was the wrong decision, I’m not sure how much it will end up costing me, although it will be much. Maybe that’s the price I’m willing to pay for making what “felt like” the right decision.
Of course, this decision is still on my mind, so I’m still paying for it in a way: it’s using up some space and my brain, and possibly causing a tiny bit of stress (really ought not that worried about it, but I have to acknowledge that it’s on my mind). If the dollar amounts involved were larger, I’m pretty sure I would have figured out more precisely how each choice would work. I would have been more certain of the “optimal” decision, but I don’t think it was worth it in this case.