Ways to benefit from tax credit without taking it?

[rscott0]

I'm coming close to buying a MS. This year, it would at best be very difficult to get any benefit from the tax credit. I'm very hesitant about buying new, as I feel like I would be throwing that money away. I'm looking to keep the car for at least 5+ years, likely longer. AP is a must-have.

I went to a Tesla Store, but the product specialist I spoke to knew little about the tax credits, instead giving me the phone number of someone who might know more. I thought I might have better luck here.

The way I see it, I have 4 options:

[1] Buy a new MS (all cash or financed), pay MSRP, and lose out on the $7,500 tax credit. But, I get a brand new car, zero miles, with a full warranty.
[2] Lease a new MS. With this, the tax credit gets applied to the residual value, so I essentially lose the tax credit if I keep the car after the 3 years. But as with buying new, I get a brand new car, zero miles, with a full warranty. And I get protection against outdated technology, if a better Tesla comes out in the next 3 years.
[3] Buy a used CPO MS. It wouldn't be new, but much/most of the tax credit would (presumably) be built into the price. Unlike buying used elsewhere, I would get a 4-year 50K warranty, which would be very nice on a used car. But, it seems that there are very few CPO MS's with AP (none the past few times I've looked).
[4] Buying a used MS, not from Tesla. Part/all of the tax credit might be built into the price. A used MS with AP is hard to come by at a good price, however, and likely would have no warranty beyond what was left on the original warranty.

I understand that AP is new, and supply/demand with the tax credits may make benefiting from them without taking them directly nearly impossible. So I simply may be out of luck. But are there other possibilities that I may be overlooking?

 

[Boourns]

This year, it would at best be very difficult to get any benefit from the tax credit.

This makes it sound like maybe next year you might be able to use the credit. If so that is definitely an option.

 

[byan1232]

If you have a parent/relative/someone you trust to be added as the co-owner of the car, you can leverage their total taxes to apply the $7500 tax credit.

What I did was I added my mom as the co-owner of the car 1) to take advantage of the tax credit 2) reduce vehicle insurance premiums

 

[mikeash]

You say this year, would next year work better? If so, that's another option: buy new, but get the car in January, and take the credit next year.

Otherwise I would aim for 3 and 4. Autopilot is coming up on two years old (the hardware started being included on all cars in mid-September 2014) and finding something used with it should be doable. Might take some looking, but doable.

 

[Gizmotoy]

Most of your points are valid, and I won't offer advice on what may be best in your situation, but are you sure you wouldn't see any benefit in Case #1?

It's a pretty rare situation where someone with the ability to buy a Model S has a total tax burden of less than $7500. And even then you can take the portion of the credit that does apply. Unless you paid a total of $0 in taxes, you will get something. Note that your tax burden is NOT what you owe at the end of the year, but the total amount of taxes you've paid (including any withholding).

 

[cpa]

There are tax strategies out there to increase one's income tax liability. You still have five months to evaluate them and determine if you can increase your income taxes sensibly. (Be careful, as state income taxes rise too, and I see that you are in Taxachusetts.)

Hire a professional to examine your recent returns and solicit advice from him or her as to what if any your options are. Better to ask this question now as opposed to next February after the die has been cast.

 

[rscott0]

Most of your points are valid, and I won't offer advice on what may be best in your situation, but are you sure you wouldn't see any benefit in Case #1?

There's still 5 months left in the year, so things may well change, but I suspect I'll have minimal (if any) taxable income. I'm self employed, and much of my income is very sporadic (and taxable income comes after business deductions, itemized deductions, and exemptions). It's a bit similar to someone who has retired, who has the cash readily available to buy the Tesla, but actual income is limited.

My sense is that Case #1 may be my best bet, taking delivery in January. I might or might not be able to take the credit in 2017, but the odds would be more in my favor. byan1232's idea is good, although might be more of a hassle than I'm looking for.

 

[privater]

I have the same reason with you: 3 years is a safe time for another generation of Tesla Model s.
like the current 'classic' Tesla won't retrofit autopilot, HEPA filter, LED light... next 3 years it autopilot 2.0 and maybe more.
I goes with [2] with S60 and still keep my Model 3 waiting for more details.
I think my financial specialist said I can only apply $7500 if I pay the residual and keep the car, Tesla won't get any benefit from $7500.
Plus in CA, the sale tax only apply on the actually lease amount, thus I don't need to pay full tax on a $70000 configuration.

 

[hybridbear]

There are tax strategies out there to increase one's income tax liability. You still have five months to evaluate them and determine if you can increase your income taxes sensibly. (Be careful, as state income taxes rise too, and I see that you are in Taxachusetts.)

What kinds of strategies increase your tax liability?

 

[rscott0]

What kinds of strategies increase your tax liability?

One common strategy is selling stocks or other investments that have an unrealized gain. For example, if you are unemployed for much of the year, or starting a new business, and you might have $5K less income than deductions. You then can sell a stock worth $10K that you paid $5K for and get an extra $5K of taxable income, but pay no tax on it.

Another would be to take money out of a retirement plan, although that likely would have other pitfalls (e.g. you may not be able to easily return it to the IRA).

 

[whitex]

When you lease they just increase the residual value by $7,500? Nice triple take, first take the $7,500 rebate, then charge the customer interest on it, then if the customer wants to buy the car, get another $7,500 from the customer? Are you sure they do that? When leasing Leafs 3 years ago the I was tol $7,500 just reduced the cap cost (never actually got the Leaf, but found out all the details at that time for someone else).

 

[LineofSight]

What kinds of strategies increase your tax liability?

Or, you may convert all or part of a traditional IRA into a Roth IRA. That will cause a tax increase for the year that you make the conversion. Then, when you take money out of your Roth IRA you won't owe any additional taxes.

 

[jelloslug]

There's still 5 months left in the year, so things may well change, but I suspect I'll have minimal (if any) taxable income. I'm self employed, and much of my income is very sporadic (and taxable income comes after business deductions, itemized deductions, and exemptions). It's a bit similar to someone who has retired, who has the cash readily available to buy the Tesla, but actual income is limited.

My sense is that Case #1 may be my best bet, taking delivery in January. I might or might not be able to take the credit in 2017, but the odds would be more in my favor. byan1232's idea is good, although might be more of a hassle than I'm looking for.

Can you defer some of your business deductions to next years taxes?

 

[rscott0]

When you lease they just increase the residual value by $7,500? Nice triple take, first take the $7,500 rebate, then charge the customer interest on it, then if the customer wants to buy the car, get another $7,500 from the customer? Are you sure they do that? When leasing Leafs 3 years ago the I was tol $7,500 just reduced the cap cost (never actually got the Leaf, but found out all the details at that time for someone else).

The $7,500 does (from everything I have read) get added to the residual value. That's good for people that aren't going to keep the car, as it lowers the lease payments, so it isn't necessarily greedy on their end.

 

[rscott0]

Can you defer some of your business deductions to next years taxes?

Unfortunately, that wouldn't be enough. I think it's time to talk to an accountant to see if there is anything I'm missing.

 

[Gizmotoy]

Unfortunately, that wouldn't be enough. I think it's time to talk to an accountant to see if there is anything I'm missing.

Might be your best bet. Now that we know the situation I think we've probably hit the limit of how we can help. I was hoping there was a misunderstanding regarding #1, but it looks like that's not the case and unfortunately the credit can't be deferred.

If you don't want to wait 6 months, give #3 and #4 another thought. Values drop dramatically in the first few years. Even if the credit *isn't* built in, you'll probably wind up ahead with a CPO, for example. Often the website doesn't give a full picture of the available cars, so it can be helpful to make your wishlist known to someone at the showroom and let them hunt a car for you.

Good luck!

 

[cpa]

Unfortunately, that wouldn't be enough. I think it's time to talk to an accountant to see if there is anything I'm missing.

That is what I suggested upthread! Good luck!

Off-topic, but about 20 years ago one of our clients who had a wholly-owned subsidiary in Massachusetts underwent a tax audit. I handled the audit and dealt with the examiners out of their Burbank, California office. What a mess! Massachusetts taxes corporations not only on their profits, but also on their net worth. The upshot of the examination was that the Commonwealth assessed about $90K in income taxes and about $850K in the excise tax on net worth. We appealed to the examiner's supervisor in Burbank--DENIED. Then we appealed to the Western Region Audit Manager--DENIED. Then we made the third and final administrative appeal to the Commissioner of Revenue in Boston--DENIED.

So, we filed suit and got the lawyers involved. About nine months later the lawyers notified us that the income tax assessment dropped to $30,000, and the $850K excise tax on the net worth was reversed in full. That was about what I had proposed after receiving the original audit deficiency notice.

 

[whitex]

The $7,500 does (from everything I have read) get added to the residual value. That's good for people that aren't going to keep the car, as it lowers the lease payments, so it isn't necessarily greedy on their end.

Comparing that to simply reducing the cap cost (i.e. reducing the purchase price and keeping a non-inflated residual):

1. Customer pays full interest on the $7,500 for the duration of the lease. 3 years at 3%, that's another $675. Let's round that down to $550 to account for the fact that the $7,500 rebate comes few months later later.
   
2. If at the end of the lease the car is worth more than the non-inflated residual, they get to pocket that difference up to $7,500. For example, say the car's real residual was $50K, they inflated it to $57.5K, the car is actually worth $55K because the customer didn't drive all the miles or the market is good, typically the customer can get that $5K difference, but not in this case. Having leased cars before, I'd guess has probably a $3,750 value on average

So bottom line, on average, the leasing company gets an extra ~$4.3K out of the deal. I'm not saying it's fair or not, just stating the numbers. Whether this is greedy or brilliant depends on your point of view. Personally I think it's quite clever of them as most people won't do the math but are concerned only about their monthly payment. Since the leasing companies are the ones offering the service using their own money, they are completely within their rights to do so - nobody is forced to use their services and other companies are free to offer better deals.

 

[Snerruc]

Or like me, you can just buy the thing and forget about the tax credit. One disadvantage of good taxman ship is that you can't take advantage of these gimmicks. A good long term strategy is more valuable than a short term credit. I can only use about $2000 of the credit, but it is better than none. I think the car is worth my net cost . Otherwise I wouldn't buy it. You should do the same.

 

[JTMedEd]

I

Comparing that to simply reducing the cap cost (i.e. reducing the purchase price and keeping a non-inflated residual):

1. Customer pays full interest on the $7,500 for the duration of the lease. 3 years at 3%, that's another $675. Let's round that down to $550 to account for the fact that the $7,500 rebate comes few months later later.
   
2. If at the end of the lease the car is worth more than the non-inflated residual, they get to pocket that difference up to $7,500. For example, say the car's real residual was $50K, they inflated it to $57.5K, the car is actually worth $55K because the customer didn't drive all the miles or the market is good, typically the customer can get that $5K difference, but not in this case. Having leased cars before, I'd guess has probably a $3,750 value on average

So bottom line, on average, the leasing company gets an extra ~$4.3K out of the deal. I'm not saying it's fair or not, just stating the numbers. Whether this is greedy or brilliant depends on your point of view. Personally I think it's quite clever of them as most people won't do the math but are concerned only about their monthly payment. Since the leasing companies are the ones offering the service using their own money, they are completely within their rights to do so - nobody is forced to use their services and other companies are free to offer better deals.

I don't believe this logic is correct. The result is the same whether the 7500 is taken off the cap cost or added to the residual value.

Let's say MSRP is 100k and residual after 3 years is 50% to make it simple. If they add 7500 to the residual, that means the you're paying 42,500 plus associated interest over the term of the lease. If instead the purchase price is reduced, now the 92,500 and the residual 50k vs 57.5k so you're still paying 42,500 plus interest.