The latest changes to the tax code, particularly increasing the standard deduction and limiting or eliminating some itemized deductions, makes it harder to legally manipulate income (increase it) to qualify if tax liability is less than the optimum. However, if you have a business with flexible income or expenses, or have traditional IRAs that can be converted to Roth IRAs, and maybe other ways I haven't thought of, it's still possible.
Businesses with pass through income like S-corps get a tax break too. As I understand it, people who get income from a pass through get a 20% deduction of that income. So if you get $50K pass through income, you get a $10K tax deduction.
OK, sorry to keep asking questions, but I want to make sure I don't miss out on this credit. So, I have a full-time job that is going to result in significantly more than $7500 being withheld from my paychecks (over the course of the year) for Federal income taxes. If I end up having, say, $8,000 withheld, and I only owe $1 (after doing my taxes in 2019), I'm going to get a refund of $7499 ($1 - $7500 for the credit), right? Or will I only get the full credit if I actually *owe* at least $7500, despite having had quite a bit more than that withheld from my paychecks throughout the year?
My understanding is that as long as you pay at least $7500 in federal income taxes one year (including those paid via paycheck deductions), you'll get the full credit (as a refund, mailed to you by the IRS) even if you owe $0 when it comes time to file your taxes. In this case, the comment that you need to adjust your withholding seems incorrect (although reducing the amount being withheld will get you some of that money sooner, in the form of income throughout the year because of larger net pay vs. a refund check sometime in 2019).
Withholding has nothing to do with it. If you knew you were getting the credit, you could get your employer to do less withholding throughout the year. The credit is just taken directly off your tax owed. Social security and medicare are a separate tax and is ignored for this discussion.
Say you did your taxes in April 2019 and you owed $6000 in federal income tax, you then subtract $7500 from that getting -$1500, but the credit is only against one year's tax, so you owe $0 federal income tax and the extra $1500 is lost forever. If your employer withheld out $8000, the IRS will refund $8000 to you.
Say your tax owed was $20,000 instead (most likely with a much higher income than above). You would deduct the $7500 and still owe $12,500. If your employer only took out $8000, you need to write the IRS a check for $4500 plus penalties and I would suggest adjusting your withholding with your employer ASAP to prevent it happening even worse the next year.
The tax credit was created to give an incentive to wealthier people to encourage them to buy more expensive EVs and help the technology develop and go mainstream. Different people have different tax situations, but it would be pretty difficult for someone making less than about $60K to end up owing $7500. With all the deductions available for dependents, mortgage deductions, property tax deductions, and various other things that kick in for the lower 60-70% of tax payers, most people making that or less pay less than $7500 a year in federal income tax. I came across a plausible scenario for a family of 4 with a household income of $100K who owed less than $7500. I think I posted it in the tax credit thread here on the forum.
I suspect the thinking of the people who crafted the bill in the first place were that people who owe more than $7500 a year in income probably have more than one car and they can afford to invest in new technology that may not be reliable. If the EV was in the shop again, they had other cars to drive. Whereas encouraging poorer people to drive EVs could leave them carless at times if their one car breaks down.
Tesla slotted right into this tax strategy, aiming for the top of the market first and the bulk of their early customers were people who had enough income to really benefit from the credit.
We see all the taxes taken out of each paycheck and think we're paying a lot of our income in taxes, but in reality for most people making less than around $100K per year, you're probably paying more in social security, medicare, and local/state taxes combined than you pay in federal income tax.
