7500 EV Tax Credit - Can Someone Explain?

[Mattzilla]

I have been searching for some clarity on this thing for a while now, but with no luck. I'm probably just not looking in the right place or something.

Correct me if I'm wrong, but as I understand it, you only get the full $7500 if you owe the federal government at least $7500 when you file your taxes. This is the difference between a tax "credit" and a tax "rebate." A "credit" is not a refund but a "rebate" is money you actually get back even if you don't owe the federal government anything when you file your taxes.

So if I purchase a Tesla this year, should I be doing anything I can to increase the taxes I owe around tax time next year? I read I should claim as many allowances on my W-4 as possible to ensure that I owe at least $7500 come tax time next year. But I've read conflicting opinions on this, too. Some say that it doesn't make a difference.

Does it matter? If not, what does? Will claiming a lot of allowances prevent me from getting the credit? What can I do to get as much of that $7500 as possible?

My wife and I both work normal jobs with salaries and we file jointly, in case that influences anything.

Please forgive my terrible ignorance on this issue. I appreciate any helpful feedback.

 

[dhrivnak]

If you pay more than or equal to $7500 in Federal taxes then you will get that money back. But if your federal tax burden for the year is only $1000 the you will only get that $1000 back. Most everyone north of $60,000 pays that much tax.

 

[ItsNotAboutTheMoney]

No. All that matters is your total tax liability for the year.

If without the tax credit, the (2015) 1040 line 56 would be greater than 0, you'd be able to use at least part of the tax credit.
If it's 7,500 or more, you'll get the whole $7,500.

It's a non-refundable tax credit that must be claimed in the year the car is "put into service", which basically means when it was delivered.

 

[Mattzilla]

Awesome. Thanks for the replies. That makes it quite a bit more clear to me.

So, in theory, having more allowances won't really make a difference outside of giving me more take home pay out of each check.

 

[ZBB]

Awesome. Thanks for the replies. That makes it quite a bit more clear to me.

So, in theory, having more allowances won't really make a difference outside of giving me more take home pay out of each check.

Correct. Don't confuse your tax liability with the withholding from your paycheck or any refund or amount due when you file. Too many people think that when they get a refund that they didn't pay any taxes -- all it means is the withholding tool too much out from your paycheck each pay period and when the tax liability was calculated when doing the tax return, you had overpaid, so got some money back...

 

[Mattzilla]

Correct. Don't confuse your tax liability with the withholding from your paycheck or any refund or amount due when you file. Too many people think that when they get a refund that they didn't pay any taxes -- all it means is the withholding tool too much out from your paycheck each pay period and when the tax liability was calculated when doing the tax return, you had overpaid, so got some money back...

Yes, unfortunately I was among that crowd. Thanks for shedding light on the issue. Allegory of the cave...

 

[murphyS85]

If you have any long term savings bonds, and deferred paying the interest, cash them before the end of the year. The interest from the bonds will increase your tax bill.

 

[Newscutter]

What is your normal tax liability (not your refund, not your withholdings, but your actual yearly tax due)? If you do nothing different, that will be the amount of your tax credit.

There are a couple things you can do to increase the credit and maximize it.

Save and track ALL sales taxes for the entire year you get the car-- every pack of gum, every water bill, etc. ALL sales taxes. When you file, you will use the sales tax deduction instead of your state income tax (it's on Schedule A, I believe). The sales tax on the car ALONE will be more than your state income tax.

Roll over some tax sheltered retirement plans into a Roth IRA account. The amount rolled over will be taxable in that year (so more income means more tax liability). Must be done before end of tax year-- not April-- so you'll be doing this as an educated guess, but it's easily adjustable to maximize the full $7500.

 

[fluxemag]

Good advice on keeping receipts for sales tax. I did that for the first time in the year I bought my car (I had a grocery bag full of receipts to enter). $6k in sales tax (use tax in AZ) on the car, plus another decent amount in normal spending, significantly exceeded the state income tax option for me. But if you're making a ton of coin, it may not.

Ironically I moved to Oregon 6 months later, where I would have paid zero sales tax.

 

[Mattzilla]

Really interesting advice, Newscutter. Appreciate that. Washington state, where I live, doesn't have a state income tax... meaning there is no state tax return to file. Washington depends on sales tax. I looked at line 56 and it looks like I should be right around 7500 next year. The part that confuses me is the language in the tax credit that it cannot be a refund. But it looks like I will actually end up getting a check from the IRS if the credit wipes out the entirety of my tax liability. Is that the correct line of thinking, or am I sill a little off base?

Thanks guys!

 

[Brass Guy]

I think you have a handle on it. By "non-refundable," they mean what you stated in your OP; that it is a credit, not a rebate. It gets subtracted from your liability (the amount the gov't is going to keep) and can bring it down as far as zero in which case you'd get refunded all your withholdings. In no case will this credit allow you to be refunded more than what was withheld, unlike other credits like EIC.

 

[ItsNotAboutTheMoney]

Really interesting advice, Newscutter. Appreciate that. Washington state, where I live, doesn't have a state income tax... meaning there is no state tax return to file. Washington depends on sales tax. I looked at line 56 and it looks like I should be right around 7500 next year. The part that confuses me is the language in the tax credit that it cannot be a refund. But it looks like I will actually end up getting a check from the IRS if the credit wipes out the entirety of my tax liability. Is that the correct line of thinking, or am I sill a little off base?

Thanks guys!

The confusion is because tax language is made by and for accountants, rather than real people.

A tax credit is called a refundable when it's treated as a tax _payment_. When you show them that you "paid" the credit, they will have to "refund" it to you unless you're using it to cover other taxes due.

Yeah.

Non-refundable means that it's a reduction in taxes owed instead, and since you can't owe less than 0 (because The Man does not like paying _you_) if you would have owed less than the credit, you only get that part of it.