How exactly does the federal tax credit work?

[ch3mtrailz]

I am taking delivery of a Model X in September. I've talked to my CPA, trolled the Internet, and I'm still not satisfied I REALLY know how the credit is applied.

Is the $7,500 deducted from my taxable income, and then I get the refund at my tax bracket. In other words, $7,500 less income * 28% = $2,100? Or, do I get a straight $7,500 off my taxes, like the equivalent of $28K in taxable income at 28% bracket?

And, then do I need to OWE money at the end of the year? I've intentionally stopped claiming my children as dependents,and done other tweaks to NOT owe a big fat chunk of change at the end of the year. Should I stop that? Should I take a big bonus at the end of the year so I definitively owe a bunch of money to the IRS and can offset it with this credit?

If anyone has experience and advice I would appreciate it. Last thing I want to do is leave money on the table, especially after the bastards audited me and put me through hell last year and were clearly making crap up to suck a few thousand out of me. That's another great story I should setup a blog for.

Thanks.

Ohio Dude

 

[TexasEV]

It's a tax credit. It's subtracted from your tax liability after your tax is calculated. If your tax liability is less than $7500 because not enough income or too many deductions, then you don't benefit from the full $7500.

 

[bonaire]

If you had wages in the year and Federal taxes taken out during the year, then you can get the full 7500 as a refund even if you owe $0 on your tax filing (without the car). Effectively - the more someone makes, the more of the tax credit is useful. This makes EV buying a bit more geared toward higher-income people. I sure wish it was a rebate and not a tax credit.

 

[ItsNotAboutTheMoney]

It is a non-refundable tax credit.

What Is the Difference Between a Refundable and a Nonrefundable Credit? - TurboTax Tax Tips & Videos

It must be claimed in the year you put your car into service. (Basically, the year in which you started driving it.)
You can still get it if you pay AMT.
It goes to the owner of the car. So if you lease the car, the leasing company owns it and you cannot claim the credit.
If there is business use involved the rules become more complicated.

IANAA.

 

[jerry33]

Is the $7,500 deducted from my taxable income, and then I get the refund at my tax bracket

No, it's deducted from the amount of tax you owe, not your gross income. So if you are rich and don't owe any tax, then no credit. If your tax liability is $7,500 or higher, then you take $7,500 off of that. If you have withheld all you owe, you get back the $7,500.

 

[ABCCBA]

@ch3mtrailz Hi, I am really curious what your CPA had to say about the subject. Would you share, please?

 

[ABCCBA]

Your answer could not be more off base and bordering untrue. Please research the subject and see if you might want to modify your answer to be a bit more helpful to people, rather than misleading.

If you had wages in the year and Federal taxes taken out during the year, then you can get the full 7500 as a refund even if you owe $0 on your tax filing (without the car). Effectively - the more someone makes, the more of the tax credit is useful. This makes EV buying a bit more geared toward higher-income people. I sure wish it was a rebate and not a tax credit.

 

[ch3mtrailz]

My CPA concurred with everyone else on here. As long as I owed or withheld $7,500 or more I would get the full $7,500 back. You have all confirmed what I thought was true. Thank you so much, everyone.

 

[ABCCBA]

Withheld is incorrect. It is solely an offset of tax liability up to $7,500.

My CPA concurred with everyone else on here. As long as I owed or withheld $7,500 or more I would get the full $7,500 back. You have all confirmed what I thought was true. Thank you so much, everyone.

 

[BluestarE3]

See IRS form 8936 and its instructions. It's all explained there. Show the form and instructions to your CPA if he's not already familiar with them. Payroll withholdings and quarterly estimated payments are irrelevant.

 

[cpa]

Chemtrailz, I am so relieved that an internet forum confirmed what your CPA told you. If you have such little faith in your accountant, then perhaps you should be looking for a new one.

With all due respect, I wonder why individuals do not believe professionals, and instead take their questions to a faceless and anonymous forum. Is it customary in this day and age to verify medical opinions or diagnoses, legal advice, engineering results and whatever other subjects on the internet? This is not a rhetorical question.

 

[ABCCBA]

lol, I had the same thought. I wonder if his CPA will give a refund for offering incorrect advice.

Chemtrailz, I am so relieved that an internet forum confirmed what your CPA told you. If you have such little faith in your accountant, then perhaps you should be looking for a new one.

With all due respect, I wonder why individuals do not believe professionals, and instead take their questions to a faceless and anonymous forum. Is it customary in this day and age to verify medical opinions or diagnoses, legal advice, engineering results and whatever other subjects on the internet? This is not a rhetorical question.

 

[bonaire]

Your answer could not be more off base and bordering untrue. Please research the subject and see if you might want to modify your answer to be a bit more helpful to people, rather than misleading.

What is untrue about it? It is a tax credit. The more liability you have, the more of the ITC you can take - up to the $7500 limit. Please correct me where you think I am wrong.

 

[ABCCBA]

@bonaire Certainly. This is a Tax Credit that is used to offset a Tax Liability of up to $7,500. Tax Liability is not based on tax withholdings.

"If you had wages in the year and Federal taxes taken out during the year, then you can get the full 7500 as a refund even if you owe $0 on your tax filing (without the car). " There are so many things that can make this statement not true, versus true. The tax credit is not based on WAGES, WITHHOLDINGS, ETC. It is solely based on the Tax Liability which is derived from Income minus Deductible Expenses, Allowances and Exemptions. Please don't confuse INCOME with WAGES.

"Effectively - the more someone makes, the more of the tax credit is useful. This makes EV buying a bit more geared toward higher-income people." - Again, not necessarily true. There are many people (all income brackets) who actually know how the tax system works and can limit their tax liabilities throughout the tax year. Therefore, there are a large number of people making very good INCOME and do not qualify or only get partial credit because their Tax Liability is low or zero. Additionally, there are a lot of people who live very well off of retirement income and other tax free income instruments who don't qualify for the tax credit because they have limited or no Tax Liability.

"I sure wish it was a rebate and not a tax credit" - Don't we all! I would have qualified for some money instead of missing out on the both Tax Credits for Alternative Fuel Vehicles and Alternative Fueling Stations.

What is untrue about it? It is a tax credit. The more liability you have, the more of the ITC you can take - up to the $7500 limit. Please correct me where you think I am wrong.

 

[bonaire]

@bonaire Certainly. This is a Tax Credit that is used to offset a Tax Liability of up to $7,500. Tax Liability is not based on tax withholdings.

"If you had wages in the year and Federal taxes taken out during the year, then you can get the full 7500 as a refund even if you owe $0 on your tax filing (without the car). " There are so many things that can make this statement not true, versus true. The tax credit is not based on WAGES, WITHHOLDINGS, ETC. It is solely based on the Tax Liability which is derived from Income minus Deductible Expenses, Allowances and Exemptions. Please don't confuse INCOME with WAGES.

"Effectively - the more someone makes, the more of the tax credit is useful. This makes EV buying a bit more geared toward higher-income people." - Again, not necessarily true. There are many people (all income brackets) who actually know how the tax system works and can limit their tax liabilities throughout the tax year. Therefore, there are a large number of people making very good INCOME and do not qualify or only get partial credit because their Tax Liability is low or zero. Additionally, there are a lot of people who live very well off of retirement income and other tax free income instruments who don't qualify for the tax credit because they have limited or no Tax Liability.

"I sure wish it was a rebate and not a tax credit" - Don't we all! I would have qualified for some money instead of missing out on the both Tax Credits for Alternative Fuel Vehicles and Alternative Fueling Stations.

I am assuming that this person had an income going on. Most people do. If the issue is that my assuming that is the problem, I agree. Not everyone has witholdings. I agree too that the Federal ITC is based on your federal tax liability. If you show no tax liability (through income and/or investment distributions) then you cannot take this ITC tax credit.

Tax liability is simply the computation of your taxes due to the federal government after your financial activities occur for the year (or quarterly). Most people actually do not have tax shelters or high amounts of tax free municipal bond type of income. I was answering for the "most people" point of view.

In addition - if someone "wants to get their credit sooner" they can adjust their federal withholdings with their company's HR department to lower their federal withholding through December - an amount to help reduce their taxes withheld also reduces their refund in the first four months of 2017.

Everyone's story is different and both of us cannot generalize. The OP should talk with their CPA about their specific situation. But I am pretty sure that many Teslas are bought by people who are not retired, living on millions invested in tax free bonds. In fact, people here have reported "stretching" to buy one (or even lease) and as such, by making under say $80,000 a year and getting a Tesla, they are venturing into cars costing "three times the cost of a car that I have ever bought". Those folks tend to have jobs and they need to figure out if leasing or buying is best for them and if they can even qualify for the full Tax Credit. As said earlier - everyone's got a different story. And we both agree "we wish it was a rebate". Would make it simpler. It could also allow for larger buys by fleet operators and dealerships of the other brands. I contend that if they really wanted to "move EVs" into the mainstream, they would have made it a rebate and not an ITC. It feels like the DoE and government choice was to punish (or dissuade) the lower-income folks or those who do not have substantial tax liability. Lower income folks will end up doing ok in the used-car market as the EVs have come down in their costs on the used-market quite substantially. Used Volts and Leafs in the 14,000 or lower range and yet drive like new. Used and CPO Teslas half their original prices. That kind of thing.

 

[ABCCBA]

I have no interest in arguing. Goodbye.

I am assuming that this person had an income going on. Most people do. If the issue is that my assuming that is the problem, I agree. Not everyone has witholdings. I agree too that the Federal ITC is based on your federal tax liability. If you show no tax liability (through income and/or investment distributions) then you cannot take this ITC tax credit.

Tax liability is simply the computation of your taxes due to the federal government after your financial activities occur for the year (or quarterly). Most people actually do not have tax shelters or high amounts of tax free municipal bond type of income. I was answering for the "most people" point of view.

In addition - if someone "wants to get their credit sooner" they can adjust their federal withholdings with their company's HR department to lower their federal withholding through December - an amount to help reduce their taxes withheld also reduces their refund in the first four months of 2017.

Everyone's story is different and both of us cannot generalize. The OP should talk with their CPA about their specific situation. But I am pretty sure that many Teslas are bought by people who are not retired, living on millions invested in tax free bonds. In fact, people here have reported "stretching" to buy one (or even lease) and as such, by making under say $80,000 a year and getting a Tesla, they are venturing into cars costing "three times the cost of a car that I have ever bought". Those folks tend to have jobs and they need to figure out if leasing or buying is best for them and if they can even qualify for the full Tax Credit. As said earlier - everyone's got a different story. And we both agree "we wish it was a rebate". Would make it simpler. It could also allow for larger buys by fleet operators and dealerships of the other brands. I contend that if they really wanted to "move EVs" into the mainstream, they would have made it a rebate and not an ITC. It feels like the DoE and government choice was to punish (or dissuade) the lower-income folks or those who do not have substantial tax liability. Lower income folks will end up doing ok in the used-car market as the EVs have come down in their costs on the used-market quite substantially. Used Volts and Leafs in the 14,000 or lower range and yet drive like new. Used and CPO Teslas half their original prices. That kind of thing.

 

[travwill]

Basically, on form 1040, line 44, if you have an amount in that "Tax" line that is positive - thus you owe $7500 in taxes or more, it'll be reduced by that full $7500 credit. It is before other deductions hit, etc.

MOSTLY ALL people will have at least $7500 tax liability in that line, usually much more so I wouldn't worry too much about it. Look at a previous return if needed to confirm what your usual scenario is.

 

[rahs]

Basically, on form 1040, line 44, if you have an amount in that "Tax" line that is positive - thus you owe $7500 in taxes or more, it'll be reduced by that full $7500 credit. It is before other deductions hit, etc.

MOSTLY ALL people will have at least $7500 tax liability in that line, usually much more so I wouldn't worry too much about it. Look at a previous return if needed to confirm what your usual scenario is.

I know this is an older thread but a few of us are discussing how the rebate works on another forum. Is the above comment correct? If not what is the final verdict? Any good CPAs here?

 

[Ampster]

I know this is an older thread but a few of us are discussing how the rebate works on another forum. Is the above comment correct?

The comment you referred to said "before other deductions hit". Depending on your interpretation it might be incorrect. The tax is usually calculated after deductions such as interest, charitable deductions etc. My interpretation is that is AFTER deductions.

 

[rahs]

The comment you referred to said "before other deductions hit". Depending on your interpretation it might be incorrect. The tax is usually calculated after deductions such as interest, charitable deductions etc. My interpretation is that is AFTER deductions.

Yea I'm still unsure. One person says one way, someone else says another way. Seems like either A or B:

A) The comment I referenced is from line 44 of your 1040 which is the amount of tax you would pay on your earnings which doesn't include the taxes that were taken out of your check, deductions, etc. You subtract 7500 from that amount.

B) Then I see the other claim which seems to make more sense that if you owe $9000 you subtract $7500. Or if you owe $3000 you owe 0 but lose out of the rest of the credit. Or if you're due a refund the tax credit doesn't help you.

Which one is it? A and B are very different approaches and would be nice to have a definitive answer.