-
Want to remove ads? Register an account and login to see fewer ads, and become a Supporting Member to remove almost all ads.
How to plan for maximizing tax credit?
- Thread starter Jason Bourne
- Start date
-
- Tags
- Model 3
Bokonon
Title-customizing Member
Since we're talking about people lowering their payroll withholding amounts... Isn't there a need to ensure that you don't reduce your withholding by too much, lest you risk having to pay a penalty for underpayment of estimated tax? Especially if your estimated delivery date is around the end of the year, and there's a decent chance that you won't be able to claim the credit in the current year?
Last edited:
I'm not a CPA, so take this as you will, but I'm 97% sure there is no penalty for underpayment of estimated taxes. Technically you could pay $0 tax all year, but as long as you pay all the taxes you owe by April 15th the following year (I believe that's the due date for filing your taxes) you will not be penalized. I know a few people that do this because they gain interest on the money throughout the year and then pay the owed amount to the IRS during tax season. If you don't have good budgeting skills this is a terrible idea since you might spend owed taxes.
Bokonon
Title-customizing Member
I'm no CPA either, and won't even pretend to understand the deeper arcana of the U.S. tax code. That said, our CPA has warned us in recent years that we are in danger of having to pay such an "underpayment" penalty, because the nature and amount of our income is such that we need to have additional income withheld on our W-4s (i.e. specifying "0 allowances" isn't enough). The IRS spells out the details here, but my understanding is that, in most cases, you're expected to pay at least 90% of your tax liability over the course of the year through payroll withholding or quarterly estimated-tax payments.
I imagine that most people who reduce their withholding and qualify to take the EV credit in the same year will have no problem avoiding the penalty. The main reason I brought this question up was to raise awareness (and seek clarification) on scenarios like the following:
(1) Taxpayer reduces withholding by more than $7500, slips under 90% threshold, incurs penalty
(2) Taxpayer reduces withholding by $7500 in anticipation of the full credit, but only receives the $3750 credit, causing them to slip under the 90% threshold and incur the penalty
(3) Taxpayer reduces withholding by $7500, has an estimated delivery date in December, but the actual delivery date slips into January, so they cannot claim the EV credit for the year in which they reduced their withholding, causing them to fall beneath the 90% threshold and incur the penalty.
Of these three, scenario 3 seems like the most likely to occur, and also carries the greatest downside risk inasmuch as it makes a $7500 difference in expected vs. actual liability.
Are these legitimate concerns for someone who is considering reducing their paycheck withholding? Or have I flopped out of my tiny, non-CPA pond?
#10 is correct along with others. It's subtracted off your total tax obligation at the end of all the computations, which is actually pretty sweet if you owe over $7,500, which I would think most will with the means to buy a Tesla. I took both the federal credit and the State rebate for my solar system two years ago and again this year for my MS purchased in September. The credit for the solar system will help bring the ROI down to five years, which is also pretty nice not to mention the extra value (not assessed and taxed in California) it places on the property, at least for the homeowner that installed it.
ModelNforNerd
Active Member
MA is in a similar situation with solar installs, except we don't have to pay state sales tax on the purchase or installation. Saving that 6.25% off the top will bring the ROI time down significantly.
I always file tax jointly-if I buy a M3 do I(we) get/claim EV tax incentive as one?
I have been hit by this, but they usually give you the first year you do it as a grace period. When I first got married, we were getting hit by the marriage penalty and I couldn't figure out what was going on. We both were claiming 0, but we still came up short by several thousand dollars. The first time it happened, we got a freebie from the IRS. The next year, we had to pay the penalty. By the third year, I had figured out what was going on and had added the extra money to the W4 over just claiming 0, and we were good.
So I think if someone did this just once, they wouldn't pay a penalty. But, tax laws may have changed since then, so anyone should check before changing withholdings.
I'm pretty sure that the IRS says you have to withhold at least a certain percentage of what your total liability for the year will be. I think that percentage is 90%. So if your total liability for the year is $10,000 you are required to have at least $9,000 withheld (or have made quarterly estimate payments) during that year. There is also an exception in a given year that says you only need to withhold at least as much as your total liability was for the previous year. So using my previous example as last year's liability ($9,000), if your income went up by so much that your current year total liability is $12,000 you wouldn't be penalized if you only withheld $9,000 this year. Now you still would have to pay the $3,000 shortage when you file your taxes but there wouldn't be an additional penalty for under withholding during the year. I'm not a CPA either but I do have an accounting degree so I know a bit about this. I'm sure there's a lot of other if's, but's and and's to be aware of so don't take this as gospel. But it at least gives you an idea of what you're expected to withhold.
The other thing I want to clarify is that your withholding does not change the amount of tax credit you are allowed to take. So don't bother increasing the amount of your withholding thinking that it will help you get the full credit. The credit is limited to your actual tax liability for the year. Others have said which line on your tax return is the key so check back a bit if you want to know. If you know you will earn enough during the year to get the full tax credit you could reduce your withholding so that you essentially get the credit back during the year so you don't have to wait until you file your taxes to get your money back. Just be careful you don't get burned by somehow not receiving the credit and finding that you owe thousands of dollars when you file your return and possibly get charged a penalty (see required withholding above). Again, YMMV, see your tax accountant for your specific case to be sure you don't get yourself into a bad situation.
The other thing I want to clarify is that your withholding does not change the amount of tax credit you are allowed to take. So don't bother increasing the amount of your withholding thinking that it will help you get the full credit. The credit is limited to your actual tax liability for the year. Others have said which line on your tax return is the key so check back a bit if you want to know. If you know you will earn enough during the year to get the full tax credit you could reduce your withholding so that you essentially get the credit back during the year so you don't have to wait until you file your taxes to get your money back. Just be careful you don't get burned by somehow not receiving the credit and finding that you owe thousands of dollars when you file your return and possibly get charged a penalty (see required withholding above). Again, YMMV, see your tax accountant for your specific case to be sure you don't get yourself into a bad situation.
Last edited:
Everyone that is thinking of changing their withholding in order to get the tax credit is incorrect. Paying less in taxes during the year does not affect that amount of tax you are liable for, which is what the credit is deducted from. The amount of tax you are liable to pay is based solely on your taxable income, which is your income minus any deductions or exemptions. Paying more or less tax each pay day has nothing to do with this.
Take a look at your tax form from this year, or last, and look at your taxable income and the amount of tax you are liable to pay based on that. On the 1040 it is line 43 for your taxable income and then line 47 for your tax liability.
If you are not sure, or do not understand this, and even if you think you do, you should talk to a tax professional before you attempt to do something to ensure you get the full credit.
Take a look at your tax form from this year, or last, and look at your taxable income and the amount of tax you are liable to pay based on that. On the 1040 it is line 43 for your taxable income and then line 47 for your tax liability.
If you are not sure, or do not understand this, and even if you think you do, you should talk to a tax professional before you attempt to do something to ensure you get the full credit.
Was wondering this myself. Do people not understand tax liability? Generally, if your income is over $57,000/year(+your deductions) then you can get the full $7500.
cpa
Active Member
Maybe Tesla should contract with income tax professionals and have a purchase option for a one-hour consultation to explain how the credit works, and what new buyers can do to maximize their credit if their taxable income is too low to be able to use the full amount.
A simple example:
Married filing Jointly
Income: $80,000
AGI: $80,000
Standard deduction: $12,600
Exemptions: $8,100
Without the tax credit:
Taxable income: $59,300
Tax Owed: $7,967.50 (tax liability)
Tax withheld: $7,000
Tax amount due with return: $967.50
With the $7,500 tax credit that becomes:
Taxable income: $59,300
Tax Owed: $7,967.50 (tax liability)
Tax credit: $7,500
Tax withheld: $7,000
Tax refund with return: $6,532.50
I'm not a pro tax preparer, though I do file my own. and this example is for 2016.
You get the $7,500 as long as the tax owed is $7,500 or more. If your tax owed is less than $7,500 then you will not get the full tax credit.
You can adjust your withholding if, like this example, you would otherwise get a big refund. That just avoids you lending the IRS your refund money for a year. You can be penalized if you don't withhold enough (check with www.irs.gov for the rules), though it may not be a large penalty. The amount of withholding will not affect the credit you receive.
Married filing Jointly
Income: $80,000
AGI: $80,000
Standard deduction: $12,600
Exemptions: $8,100
Without the tax credit:
Taxable income: $59,300
Tax Owed: $7,967.50 (tax liability)
Tax withheld: $7,000
Tax amount due with return: $967.50
With the $7,500 tax credit that becomes:
Taxable income: $59,300
Tax Owed: $7,967.50 (tax liability)
Tax credit: $7,500
Tax withheld: $7,000
Tax refund with return: $6,532.50
I'm not a pro tax preparer, though I do file my own. and this example is for 2016.
You get the $7,500 as long as the tax owed is $7,500 or more. If your tax owed is less than $7,500 then you will not get the full tax credit.
You can adjust your withholding if, like this example, you would otherwise get a big refund. That just avoids you lending the IRS your refund money for a year. You can be penalized if you don't withhold enough (check with www.irs.gov for the rules), though it may not be a large penalty. The amount of withholding will not affect the credit you receive.
Bokonon
Title-customizing Member
Yes, just to be perfectly clear -- this is the kind of in-advance optimization exercise driving my the scenarios I outlined. As many have stated on this thread, changing your withholding does not change your liability.
Are these legitimate concerns for someone who is considering reducing their paycheck withholding? Or have I flopped out of my tiny, non-CPA pond?
Definitely legitimate concerns. Certainly safest to leave withholding as it is and get a refund on your taxes when you claim the credit. However, in a lot of cases people can probably be pretty sure about the refund. The biggest case is if you buy the car early in the year and don't want to wait an entire year to get the money, you could reduce your withholding to start getting back that money immediately.
cpa
Active Member
Just do not forget two things: One--do not change your state withholding. You will need to make it clear to the payroll clerk that you want a federal change only. You might have to complete a state form as well to keep your state withholding constant.
Second, on January 2, return to the payroll department and reinstate your previous federal withholding. Otherwise, come the following year, you might be in for a $7,500 surprise on page 2 of your 1040.
A couple more additional thoughts on how to "maximize" the tax credit:
For those who have sub $7,500 tax liability, or if your household is purchasing two and have sub $15,000 tax liability, another thing to consider is the sale of investments which would trigger capital gains taxes owed. Then subsequently repurchase the investment and have a higher cost basis, which would reduce your future capital gains and tax amounts.
I think this advice would only apply to those who are currently in between jobs, graduate school, or those who are financially independent and have a large net wealth but low income tax liability. If you're a regular wage earner and have difficulty hitting the $7,500 tax liability due to limited wage income, either you're buying a car too rich for your blood or you're doing an awesome job at finding tax deductions.
For those who have sub $7,500 tax liability, or if your household is purchasing two and have sub $15,000 tax liability, another thing to consider is the sale of investments which would trigger capital gains taxes owed. Then subsequently repurchase the investment and have a higher cost basis, which would reduce your future capital gains and tax amounts.
I think this advice would only apply to those who are currently in between jobs, graduate school, or those who are financially independent and have a large net wealth but low income tax liability. If you're a regular wage earner and have difficulty hitting the $7,500 tax liability due to limited wage income, either you're buying a car too rich for your blood or you're doing an awesome job at finding tax deductions.
For most people long term gains are 15%. With no tax liability that's selling $100,000 worth of stock to provide $15,000. Makes perfect sense though. I'd repurchase immediately in this market.
This is absolutely incorrect. You cannot make a lump sum payment at the end of the year without being subject to a 2210 underpayment penalty (2210 is the form used to calculate the underpayment penalty). The government wants their money in roughly even payments throughout the year, either in withholding or 4 equal quarterly estimates.
To avoid the 2210 penalty, you must:
1 - Pay 90% of the total tax due OR 110% of the prior year's tax bill
2 - AND make your payments through withholding or equal quarterly estimates (a payment with your return by Apr 15th is considered a Q4 estimated payment)
Paying nothing during the year and paying it all with the return will owe a penalty. If you aren't paying the penalty, you aren't calculating the 2210 correctly and haven't gotten caught.
My income varies throughout the year, and tends to go up at the end. I've gotten hit with penalties in years when Q4 was better than expected and results in a higher than expected tax bill. Yes, I'm supposed to know in Q1 how much I'm going to owe at the end of the year and pay it in Q1. You can't say "Well, I made a lot in Q4, so I'll pay it in Q4" - you were supposed to know that was coming (even if you can't predict) and pay for the Q4 income in Q1, Q2, Q3, and Q4.
Correct, changing you withholding does not change whether or not you get to take the credit, but it does essentially change when you can take the credit. Don't change your withholding and you get the credit in one lump sum next April. Decrease you withholding, and you get to take the credit now through the end of the year in smaller increases in your net pay.
Similar threads
- Sticky
