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Tax Credit Clarification
- Thread starter SmarterMotors
- Start date
AZ Desert Driver
Rare combination
Had lunch with a fellow that revealed some interesting attitudes on electric cars. They don't pay highway tax, so he has to fund EV's. They don't pay for electricity at Superchargers, so he is subsidizing (I know from earlier posts that SC are in the cost of the car). They get advantages that I don't (HOV lanes, special parking). They don't support the parts/repair system. They don't support the dealership model.
I was not about to share with him my excitement at being a Model 3 reservation holder. He might have overturned the table and engaged in a food fight.
So - with such strong feelings roaming out there, it makes me a bit scared to park my car in a mall lot where such hatred could result in vandalism. It makes me not want to ask the Gov for more tax advantage - it just fuels the hate.
I like the tax-credit, but don't need it to justify the car. The car alone has the promise of so many features that justify buying.
Perhaps it is wise to not poke the bear for any more tax credits . Comments?
I was not about to share with him my excitement at being a Model 3 reservation holder. He might have overturned the table and engaged in a food fight.
So - with such strong feelings roaming out there, it makes me a bit scared to park my car in a mall lot where such hatred could result in vandalism. It makes me not want to ask the Gov for more tax advantage - it just fuels the hate.
I like the tax-credit, but don't need it to justify the car. The car alone has the promise of so many features that justify buying.
Perhaps it is wise to not poke the bear for any more tax credits . Comments?
AZ Desert Driver
Rare combination
They do seem to have an outsized influence . Perhaps my lunch friend (a telecommunications fellow) has some dealer friends that just NEED protection.
Try driving around a Volt. Not only does it have all the same arguments against EVs that your friend had, but it's "Obamas" car or the "tax payer funded" car. Since GM was involved in the government bailout during development of the Volt there are people out there who believe some crazy stuff. Some folks on the Volt forums have experienced getting their cars keyed, but it's pretty rare.
I might worry more when I move back to TX from CA though.
Darryl
ModelXTracker.com Co-Adm
You have a republican controlled congress. Do you think any bill which will increase public debt will even get out of committee? There have already been two attempts to increase the amount of credit and to take off the 200,000 limit. Both never left committee. You would be better working at the state level to get some type of state credit.
Tesla had created this video talking about the tax credit and financing 3 years ago. It seems like they're trying to do something different than just a tax credit you'd claim when you filled out your taxes. Am I wrong or have things changed since then? Anyone with any insight on this?
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Big-T
Member
AMAZING news for Washington State model 3 buyers! Washington will now waive taxes on the first 32k price of an EV instead of limiting the price of a qualifying EV to no more than 35k.
Reddit thread here
The actual Bill here
I'm still reading thru the bill to see if your trade in counts against the cap of $42,400 but this gives me a lot more room to play with upgrades and (hopefully) keep my place in line based on options without loosing out on tax savings
EDIT - OK I found the following statement in the bill: The way I read this is that you can option the Model three to high heaven and still have the first $32,000 except from tax because the base model will list for under $42,500 can someone with abetter legal/tax background step in and confirm I'm reading that right?
A sale, other than a lease, of a vehicle identified in subsection
(1)(a)of this section made on or after July 1, 2016, and before the expiration of the exemption as described in subsection (6) of this section, is not exempt from sales tax as described under 6 subsection (1)(b) of this section if, at the time of sale, the lowest manufacturer's suggested retail price, as determined in rule by the department of licensing pursuant to chapter 34.05 RCW for the base model is more than forty-two thousand five hundred dollars.
Reddit thread here
The actual Bill here
I'm still reading thru the bill to see if your trade in counts against the cap of $42,400 but this gives me a lot more room to play with upgrades and (hopefully) keep my place in line based on options without loosing out on tax savings
EDIT - OK I found the following statement in the bill: The way I read this is that you can option the Model three to high heaven and still have the first $32,000 except from tax because the base model will list for under $42,500 can someone with abetter legal/tax background step in and confirm I'm reading that right?
A sale, other than a lease, of a vehicle identified in subsection
(1)(a)of this section made on or after July 1, 2016, and before the expiration of the exemption as described in subsection (6) of this section, is not exempt from sales tax as described under 6 subsection (1)(b) of this section if, at the time of sale, the lowest manufacturer's suggested retail price, as determined in rule by the department of licensing pursuant to chapter 34.05 RCW for the base model is more than forty-two thousand five hundred dollars.
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AZ Desert Driver
Rare combination
This video made me want to JUMP at the chance to drive a new S.....but then I recall others that say the tax credit is charged back to you when you close out the lease. So, you never get the $7500, only a temporary decrease in the principle financed.
I'm back at a straight purchase and telling the IRS to credit back my tax bill.
Any insights into this?
dgpcolorado
high altitude member
That appears to be correct with the way leases are currently structured by Tesla's leasing partner.
As has been discussed elsewhere, you can only claim a credit up to the amount you pay in taxes (1040 line 44) or $7500, whichever is lower. It takes a pretty substantial income to get to paying $7500 in federal income taxes in a single year (at least $57k for singles and $77k for couples filing jointly).
The way you read it and the way Electrek (More EVs will get a sales tax break of ~$3,000 in Washington state starting in July) is reading it is the same. Living in Washington, I'm stoked about this.
AZ Desert Driver
Rare combination
lessee- if I pull $42,000 from my IRA and am in the 18% bracket - that just balances the $7500 tax credit . Ouch, my brain hurts. too tough
SageBrush
REJECT Fascism
Funny, but debatable strategy that I think is true is some cases.
In may case e.g., I would pay a lot more than 18% on the income, and that excess would not be recouped in retirement. It kinda sorta breaks down like this:
- Loss of tax credit worth $1500
- Bump up into higher tax bracket the year I convert the IRA
- Extra 15% tax related to health insurance
- Will not recoup state income tax
- Roth has minimal to no advantage over IRA for me in lifetime tax burden
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dgpcolorado
high altitude member
Good question: it makes a BIG difference. When you purchase the car you claim the tax credit on your taxes, for however much you pay in federal income tax in the year of purchase (buy in 2016, file for credit the next year when doing 2016 tax return) up to $7500.
If you lease the car the tax credit goes to the leasing company. Here's where it gets complicated: the leasing company can, if they choose, give you the benefit of the tax credit by using it as part of the down payment or by increasing the residual value of the car. Tesla's leasing partner currently uses the latter method. By increasing the residual value of the car they reduce the capital cost that is being financed by the lease, thus reducing lease payments. However, if you were to buy the car at the end of the lease, Tesla's leasing partner currently charges the residual plus tax credit, meaning that you get zero benefit from the credit and the leasing company keeps it. This makes leasing-to-buy a very bad deal as Tesla leases are currently structured (but it could change).
Example: you lease a Model 3 for $42,000 and put $2000 down, the residual value at three years is $21,000. The lease would be based on $42,000 - $2000 -$21,000 = $19,000. So, your lease payments would need to cover $19,000 plus interest over three years. Counting the tax credit it would work like this:
$42,000 - $2000 - ($21,000 + $7500) = $40,000 - $28,500 = $11,500. The lease payments would cover $11,500 plus interest and be much lower than when they were based on $19,000.
So far, so good. However, if you buy the car off-lease you would pay $21,000 in the no tax credit case but would have to pay $28,500 in the tax credit case (according to Tesla representatives I have spoken with). The leasing company keeps the tax credit as pure profit, because they do own the car, after all, although it makes little sense if the goal is to sell cars.
Yes, I used that strategy when I purchased a LEAF in 2011: I converted a chunk of one of my IRAs to a Roth IRA, thus raising my income (because a taxable IRA to Roth IRA conversion is counted as taxable income). The problem is that by doing that I ended up raising my tax bracket, thus offsetting a large part of the benefit I gained from receiving the tax credit. (Because I ended up paying more in taxes than I would if I had just gradually converted my IRA over many years in a lower tax bracket, my usual strategy.) So, yes you can do this, but unless you stay in your usual tax bracket it is somewhat tax-inefficient. FWIW.
Just withdrawing money from a taxable IRA wouldn't work well unless you are over age 59½. Otherwise you would pay a penalty on top of the income taxes owed. Not a good idea.
AZ Desert Driver
Rare combination
shudda figured there would be some tax specialist. My premise was I was 18%...and to get that 18% was complicated as just stated. In my case, I pull IRA money as needed for lifestyle. If I have not reached the next bracket, then I roth-convert up to that bracket. Figured no one needed to know these dance steps, just "18%" to keep it simple.
dgpcolorado
high altitude member
I do the same. But I've been doing it for so many years (seventeen) that my remaining taxable IRA account will be fully depleted well before I reach age 70½ and have to fuss with required minimum distributions. So I don't need to take out any more than I need to generate the income I want. I try to make sure I fully use the 0% bracket and push myself into the 10% tax bracket each year. But raising my income high enough to generate a $7500 tax bill would be a waste. (Not a common problem among current Tesla owners, I would guess!)
If it's a Traditional IRA, why not just convert it to a Roth IRA and pay the income tax on it instead of taking a distribution? There are no penalties for a conversion and generally no limits either. That is what I would do...
Roth IRA Conversion Rules | Can You Convert from a Traditional IRA?
^^^More info on conversions
This video is based on their lease program. Also, it doesn't work exactly like how Elon said (maybe it did when this video was made in 2003).
Based on my conversation with Tesla's Finance Dept, this is what I got:
LEASE: The down payment is reduced by the State's Rebate (if there is one for your state - some states do not have rebates but instead tax credit and that cannot be used as a down payment and to make it even more complicated some states do not allow tax credits for leases). For example, here in California they will apply the $2500 CA State EV Rebate against the down payment. However, the Federal $7500 tax credit is instead used to inflate the residual value instead of reducing cap cost. Basically if you choose to buy at the end of the lease, it will cost you $7500 more.
FINANCE: In a finance scenario, the $2500 CA State EV Rebate will be applied towards a down payment. The $7500 does not do anything to reduce the finance agreement. You will get to reduce your federal income tax bill by $7500 when you file your taxes.
Leasing is a good option as long as you do not intend to buy the vehicle at the end of it's term. Also, leasing is good if you do not have enough tax liability to take advantage of the full $7500 tax credit. BUT, if you want to own the vehicle, you should definitely buy it because if you lease and then buy it at the end, Tesla is taking back the $7500 tax credit.
AZ Desert Driver
Rare combination
I understand the Trad/Roth conversions. I did that while working (before retiring) to minimize the size of future RMD. Now, I make withdrawal from IRA for daily living expenses. So, I could pull $42,000 from Roth, or sell assets held in my street account, or withdraw the full cost of the car from the IRA. If I did my homework, I should be right in the 18% bracket. And by coincidence, 18% of the price of the car = $7,500 tax credit.
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