[Incorrect post] EV Tax credit mischaracterization

[PhysicsGuy85]

mod edit: I have left this in place due to the fact that the follow up discussion has value, but have edited the title and added this blurb. The OP agrees this is incorrect after the discussion.

I have been following EV's and Tesla for several years now. How this information evaded me until today, I don't know, but I can only assume MANY other Model 3 reservation holders do not fully understand how the EV tax credit will work for them come tax time. Until today, I had assumed it was along the lines of a rebate check, or at the very least like the renewable energy ITC, where it rolls over for several years.

What I learned today is that the EV tax credit only reduces your TAX LIABILITY to $0, and only for one year.

Again, this information has been out there for a long time, but it is not often made clear in most related articles when the credit is being discussed, or usually, never mentioned at all. It is especially misleading on carmakers (Tesla included) sales pages, where they show you a -$7500 as if it were a straight up rebate.

So for anyone out there who did not know this, here is how it works: a) Say you owe $10,000 to the Feds in April (again, most people never owe even close to that). If you qualify in time for the full $7500, you would now owe the Feds on $2500. b) Say you only owe $2000 to the Feds, your $7500 credit would reduce your liability to 0$ for that year only, and rest of the credit is gone like a fart in the wind. If you get a rebate every year, you will get nothing back from the EV tax credit.

I am predicting I will get my M3 when the credit is at 50%, or $3,850. My usual annual tax liability is less than $1000. So, really, there is no rush for me. I might as well wait for the AWD since I am not going to get much savings anyways.

So if I am thinking of this wrong, or have misunderstood somehow, please correct me. I am very interested to hear how many Model 3 reservation holders who have never purchased an EV before, hence they wouldn't have gone through the tax process, knew that this was how it worked vs. it working like a rebate.

I am also curious to know what, if anything, people have done to increase their tax liability, such as decreasing your paychecks tax withholding by increasing your W4 withholding number.

 

[JeffK]

Follow the rest of the discussion here: Tax Credit Clarification

 

[PhysicsGuy85]

Follow the rest of the discussion here: Tax Credit Clarification

Thanks Jeff. That article should be pinned. I searched the forum for "tax credit", and never saw that article.

 

[granger]

There is a difference between what you owe and what your tax liability is. Changing your withholding will change what you owe come April 15th, but it does not impact your tax bill. Without getting too complex, your tax liability is what you owe the federal government based on what you earned during the year less deductions. The credit will reduce that liability. What you withhold is money put away to satisfy that liability. When you get a rebate, you withheld too much. When you owe, you withheld too little.

The credit will benefit almost everyone that buys this car for the time it is available.

 

[PhysicsGuy85]

Follow the rest of the discussion here: Tax Credit Clarification

Actually, I take that back, that thread mainly talks about the phase out of the tax credit, not how it works, at least not on the first page of replies.

HOW IT WORKS on TAX DAY is what needs to be clarified. I get the feeling that most new EV buyers think it is a rebate. IT IS NOT.

 

[Az_Rael]

You are thinking about it wrong. Your tax liability has nothing to do with your withholdings.

Your tax liability is shown on line 47 of your 1040. Pull up last years tax return and take a look at that number. THAT is your tax liability. Now take a look at lines 48-55. Those are where the credits go. If you get other credits such as the child tax credit, that plus the EV credit will reduce line 47 to zero, but not lower.

So line 47 is the key. I am willing to bet your line 47 is more than $7500.

 

[PhysicsGuy85]

There is a difference between what you owe and what your tax liability is. Changing your withholding will change what you owe come April 15th, but it does not impact your tax bill. Without getting too complex, your tax liability is what you owe the federal government based on what you earned during the year less deductions. The credit will reduce that liability. What you withhold is money put away to satisfy that liability. When you get a rebate, you withheld too much. When you owe, you withheld too little.

The credit will benefit almost everyone that buys this car for the time it is available.

Lets get complex! I like details. So maybe I misunderstood it. Can you give me an example using some basic numbers?

 

[voidptr]

So for anyone out there who did not know this, here is how it works: a) Say you owe $10,000 to the Feds in April (again, most people never owe even close to that). If you qualify in time for the full $7500, you would now owe the Feds on $2500. b) Say you only owe $2000 to the Feds, your $7500 credit would reduce your liability to 0$ for that year only, and rest of the credit is gone like a fart in the wind. If you get a rebate every year, you will get nothing back from the EV tax credit.
​

No, that's not how it works. It's a credit off of what you owe for the year, not what you're short in April.

If you paid $10,000 in paycheck withholding over the year, and came out dead-even when you filed your 1040 excluding the EV credit, you'd get a $7,500 refund. If you owed $1,000, then you'd get a $6,500 refund. If you were already due a refund of $1,000, then you'd get $8,500 back.

The way you get less than the full credit is if your entire federal tax bill is < $7,500 for the year, including withholding. Which is about $48,000 of taxable income in 2017.

If you take delivery early in the year, you can figure out what to change on your W4 to get more of it back during the year instead of just as a lump sum refund, but you don't have to (and if you do, remember to reset it at the end of the year).

 

[PhysicsGuy85]

Ok, so my line 47 amount was $2450. Last April, I owed $600. So what you are saying is that my line 47 would go to zero, meaning that instead of owing $600, I would now receive a refund of $1850 ($2450-600)???

 

[atlas310]

It's deducted from the total tax liability for the year, not how much you owe. If $700 are withheld for taxes every month from your paycheck (equating to $8400 for the year) and you still owe $1000, assuming you get the full $7500 credit, you would not owe the $1000 and you would get $6500 back from the IRS that was withheld.

 

[granger]

You are thinking about it wrong. Your tax liability has nothing to do with your withholdings.

Your tax liability is shown on line 47 of your 1040. Pull up last years tax return and take a look at that number. THAT is your tax liability. Now take a look at lines 48-55. Those are where the credits go. If you get other credits such as the child tax credit, that plus the EV credit will reduce line 47 to zero, but not lower.

So line 47 is the key. I am willing to bet your line 47 is more than $7500.

For reference

 

[Az_Rael]

Ok, so my line 47 amount was $2450. Last April, I owed $600. So what you are saying is that my line 47 would go to zero, meaning that instead of owing $600, I would now receive a refund of $1850 ($2450-600)???

Yes, and you are not able to fully utilize the $7500. For folks in that scenario it might make more sense to lease the car (and hope Tesla offers that option)

 

[Snerruc]

When I got my S, I only was only able to use $400.00 on the credit. I'm very tax efficient. Anyone with less than $7500.00 in owed taxes will only be able to a part of the credit. It is really not proper to advertise the credit the way it is advertised . A lot of 3 buyers are going to get a rude surprise . It' s not just Tesla. They all advertise this way.

 

[PhysicsGuy85]

So for anyone out there who did not know this, here is how it works: a) Say you owe $10,000 to the Feds in April (again, most people never owe even close to that). If you qualify in time for the full $7500, you would now owe the Feds on $2500. b) Say you only owe $2000 to the Feds, your $7500 credit would reduce your liability to 0$ for that year only, and rest of the credit is gone like a fart in the wind. If you get a rebate every year, you will get nothing back from the EV tax credit.
​

No, that's not how it works. It's a credit off of what you owe for the year, not what you're short in April.

If you paid $10,000 in paycheck withholding over the year, and came out dead-even when you filed your 1040 excluding the EV credit, you'd get a $7,500 refund. If you owed $1,000, then you'd get a $6,500 refund. If you were already due a refund of $1,000, then you'd get $8,500 back.

The way you get less than the full credit is if your entire federal tax bill is < $7,500 for the year, including withholding. Which is about $48,000 of taxable income in 2017.

If you take delivery early in the year, you can figure out what to change on your W4 to get more of it back during the year instead of just as a lump sum refund, but you don't have to (and if you do, remember to reset it at the end of the year).

Ok, sweet, so the articles I read today that I thought were clarifying this were actually still not entirely clear. So what I need to do is increase my income, thus my tax liability, to realize more of this credit.

 

[Zaphod]

 

[PhysicsGuy85]

So I feel like this thread should then be deleted, with a more accurate description written up somewhere. Either way, a lot of people are in for a rude awakening, thus it would be nice to get this info out there.

 

[Max*]

Not this again. Not more misinformation.

 

[Max*]

So for anyone out there who did not know this, here is how it works: a) Say you owe $10,000 to the Feds in April (again, most people never owe even close to that). If you qualify in time for the full $7500, you would now owe the Feds on $2500. b) Say you only owe $2000 to the Feds, your $7500 credit would reduce your liability to 0$ for that year only, and rest of the credit is gone like a fart in the wind. If you get a rebate every year, you will get nothing back from the EV tax credit.

No no no no no no no no no no no no no no no. I don't know how many times we need to go over the same thing.

It has NOTHING to do with what you owe in April. It has everything to do with what your LIABILITY is.

Liability = what you owe the feds for the whole year
Withholdings = what you withhold from your paycheck (etc.) during the year
Tax time in April = Liability - Withholdings. If you withheld too much, you get a refund. If you didn't withhold enough, you owe uncle sam more money (and possibly a penalty).

The Tesla rebate is dependent on the liability. Not the withholdings. Nothing to do with April, except that's when Tax season ends.

For your case. A) correct
B) If your tax liability was more than $7,500, you'd get a check for $5,500 back
C) if you were due a refund in April, because your withholdings exceeded your liability (and your liability is more than $7,500). You'd get a check for $7,500+whatever you overpaid.

 

[zer0cool]

To OP, as others have pointed out, it's your total tax liab, not how much you owe due to withholdings. I think you should edit your original post so people can see the correct accounting.

 

[Max*]

Ok, so my line 47 amount was $2450. Last April, I owed $600. So what you are saying is that my line 47 would go to zero, meaning that instead of owing $600, I would now receive a refund of $1850 ($2450-600)???

Yes.