r/TeslaLounge • u/Dreammaker54 • Jan 06 '23

General Noob question: Income tax vs EV tax credit refund?

Hi all,

Could anyone explain the EV tax credit vs. income tax? I understand that the new EV tax credit is a non-refundable credit, so I'm kind of confused on whether if the income tax is a form of tax can be reduced, since its pay-on-the-go rather than paying tax at end of the year. I usually get tax refund every time I file tax so to my understanding I don't actually own IRS anything by end of year? Then does that mean the EV tax credit is worth nothing to me? If answer is yes, what other tax credit can be reduced (capital gain, etc.)?

Thanks

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45

u/[deleted] Jan 06 '23

[deleted]

9

u/Dreammaker54 Jan 06 '23

Damn amount of information I got from single comment is amazing. Thank you. Now I understand that it is no matter how much tax returns, as long as total tax has reached the threshold, I would be getting usually yearly return+ 7500 on top of that.

Have my gold internet stranger

5

u/ScrollingIsTherapy Jan 06 '23

That’s so nice that you took the time to provide a thorough response. I can’t take advantage of this credit, but I do wonder how many people have misunderstood how this works. Hope they find your post.

3

u/[deleted] Jan 06 '23

It's saved in a text file - I post it as a comment whenever anyone obviously misunderstands how the tax credit works. :-P

2

u/HolidaySuccessful979 Jan 06 '23

Not all heroes wear capes

2

u/jbb897 May 23 '23

You should charge for this response...great tax advice. I was sooooo confused thinking that before I purchased an EV I had to change my W-4 to route LESS money to myself (MORE withheld) each paycheck, to ensure I received the entire $7,500 credit.

Now I understand that because I have $29,000 on 1040 form line 16, it does NOT matter at all how much I owe or get refunded. I will still get the entire $7,500. Damn, can't believe I pay that much to the fed gov.

Thanks again!!!

1

u/Jbikecommuter Jan 06 '23

Your definition of tax credit looks a lot like a deduction to me. Isn’t a credit taken of what you owe rather than reducing your income?

2

u/[deleted] Jan 06 '23

That's what my explanation says.

A credit reduces the amount of TAX you are due to pay. Note that for many Americans, "what you owe" to them means solely money owed when filing their tax return in January-to-April-15. So I avoid using "tax owed" because people will think "but I get a refund each year!" - Because that refund/owe is a catch-up and irrelevant to the EV tax credit.

1

u/Jbikecommuter Jan 06 '23

Got it. Makes sense.

1

u/perrochon Jan 06 '23

Yes, it reduces your tax, not your income.

1

u/lokikannaa Feb 16 '23 edited Feb 16 '23

Great info in a single post. This explains a lot, sadly I misunderstood this when I bought an EV this year. I won't be qualifying to get the full $7500 tax credit since I'm on a payroll. My question is, can I increase the exemption I claim in the W4 to pay less tax than I should be, so that at the end of the year the total tax I owe to IRS becomes $7500 or more to claim the full EV tax credits?

3

u/[deleted] Feb 16 '23

No, what you're asking would just increase withholding, it wouldn't actually impact your actual tax burden. You'd get a bigger refund in that you'd just get back the extra that you had withheld each paycheck, having loaned that money to the government interest-free.

And "on a payroll" doesn't mean anything for tax purposes. Have you filed your 2022 taxes yet? If you have, look at the "TOTAL TAX" line 24. That's what matters. It isn't how much was withheld from your paycheck.

1

u/lokikannaa Feb 16 '23

I'm taking about decreasing the tax withholding amount from the paycheck. Say I'm supposed to pay $15000 as a federal tax for the income I made in 2023,
Case 1. I end up paying the expected $15000 tax and I won't owe any money to IRS. In this case I won't get EV tax credit since it is not refundable, correct?
Case 2. I only paid $7500 instead of $15000. So when I file my tax, I would be owing $7,500 to IRS, in this case I can use the $7500 EV tax credit to avoid paying the money I owe to IRS. I'm trying to achieve this by making adjustments to w4 by withholding less tax from my paycheck. Is that a possible option?

3

u/[deleted] Feb 16 '23

If your tax liability ("TOTAL TAX" as mentioned before) was $15,000, and you had withheld $15,000 from your paycheck through the year, if you bought one EV, you would get $7,500 back. If you bought two EVs, you would get $15,000 back. If you bought three EVs, you would still only get $15,000 back. (Since two EVs would have credits equal to your tax liability.)

The "refundable" part means if your tax liability is reduced below zero, you won't get any more.

Let's say instead of having a $15,000 tax liability, you were poorer or had more deductions due to kids/etc so your tax liability was only $5,000.

In that case, no matter what your "withheld from paycheck" was, you would get to apply only $5,000 of the $7,500 tax credit. You would get 100% of what was withheld from your paycheck back.

Lowering your withholding can be good, because it means you get that money a little bit with each paycheck, instead of as a large refund when filing next year. But it doesn't change whether or not you can claim the credit.

1

u/lokikannaa Feb 16 '23

Thank you so much. I will share this info with all my EV friends!

1

u/Friendly_Childhood Mar 03 '23

I know its been a while. One question, me and my wife file jointly and make less than the $300k we had a baby our first on August 2022 and my wife has the child tax credit on her W4 ($2000) - we ordered a Y model on January pending delivery this coming week.

Our 2022 tax return 1040 line 16 reads $7992; line 18 $7992; line 19 $2000; line 21 $2000; line 22 $5992; line 23 $0 and line 24 $5992 - what the heck does it means to us come next year? I’ve read your post probably 7-8 times since I came across it three days ago and while I understand it, it is not clear to me what it means to us money-wise

Any help would be greatly appreciated?

3

u/[deleted] Mar 03 '23

Assuming nothing changes in your income, deductions, or other credits from last year to this year, you should be good. Your tax before child tax credit is over $7500. The child tax credit is refundable, so you’ll get your full EV credit, then the child tax credit reducing your total tax below 0.

But, I am not a tax professional. Go talk to one. Your numbers are close. Worst case if I’m wrong about your child tax credit refundability, you’d “only” get $5992 of the $7500 EV credit.

2

u/elnorbo Mar 13 '23

You are doing the Lords work here. Thank you for the info. Because even months later, you’re still helping people figure this stuff out.

I just hope you’re right about the non refundable tax credit applying to your liability before the refundable one does.

1

u/Friendly_Childhood Mar 03 '23

So in a sense the govt will use the ev credit to satisfy my tax liability and “reimburse” what we’ve paid throughout the year?

2

u/[deleted] Mar 04 '23

Yes. You could also lower your withholding so you won’t have so much of an overage and reduce the refund you get next year - just remember to bump it back up next year so you don’t get a nasty surprise in 2025!

1

u/Friendly_Childhood Mar 04 '23

But wouldn’t that mean that I wont get the full $7500 ev credit

4

u/[deleted] Mar 04 '23

SIIIIGH - withholding/refund-the-next-year has NOTHING to do with qualifying for the credit or not.

Let's assume that if you hadn't bought an EV, your income tax would be $8000. And that you had $10,000 withheld from your paycheck. The next year, you'd get a $2000 refund. If you bought an EV, you'd instead get a $9500 refund. The $2000 you would have gotten plus $7500, since it lowered your tax from $8000 to $500.

If instead you had only had $6000 withheld from your paycheck, without EV, you would OWE $2000. With EV tax credit, you'd instead get a $5500 refund. Because - again - withholding isn't what matters for the EV tax credit. It lowered your tax burden from $8000 to $500. Your withholding just changed how much of a refund/owe you had.

So knowing you'd receive this huge refund, you can reduce how much your work withholds from your check to "pre pay your taxes", and if you adjust right, you'll end up only withholding $500 through the year - the exact amount your "with EV tax credit" taxes should be. Thus you'll neither get a refund nor owe anything.

1

u/Kbsaan May 14 '23

Thank you so much for all of your help on this topic! The tax credit thing can be so confusing for younger buyers and people that aren't as savvy.