How to plan for maximizing tax credit?

[Jason Bourne]

Hi all
This is not a thread about how the Federal tax credit works for EV purchasers, or how the phaseout works.

What this thread is asking is, for a person who thinks they might take delivery of their Model3 in 2017, how should that person go about planning their Federal tax liabilities in order to maximize the $7500 tax credit? Meaning, according to Intuit, if your Federal tax liability is less than $7500 for the year in which you receive the tax credit, you don't get a refund of the difference and you don't get to carry it to the next year. I imagine most people are like myself where I may get a refund or owe a grand or two, but I don't think most people in normal years would owe $7500.

So how to make sure you 'owe' $7500 in 2017 is tricky, especially since the tax payer in my question's scenario can't be sure he'd take delivery of the car (and the tax credit) in this tax year? Are there wise things that can be done on relatively short notice that would create a large tax liability? For example, if a person realizes in October 2017 that they will be getting delivery of the car and tax credit in 2017, there's not much time to figure out how to maximize the usefulness of the tax credit. Again, because if your tax liability is less than $7500, you're not fully using the credit.

I guess one option is to stop withholding federal taxes from a salary paycheck. Would modifying your W4 be the right way to do that? Do companies typically allow their employees to make several modifications to withholding information on the W4 within a short period of time?

This isn't really an issue for most people who currently have reservations because it's clear that delivery won't be in 2017. But what about the 40k reservations that have a good chance of being delivered +/- 4 weeks of Jan 1?

 

[thefortunes]

As already discussed/debunked in multiple threads, the $7500 tax credit is not limited to what you "owe" when you submit your filing, it is limited by what your total tax is before credits (line 47 on form 1040).

There are multiple levers anyone can pull to increase or decrease taxes in a given year. Google is your friend (or preferably work with your CPA).

BTW, yes you can modify your withholding at any time (which also debunks the common misnomer that you have to wait a year to get your Plug-in Electric Drive Motor Vehicle Credit). Just modify your withholding in the year that you know you will take delivery.

 

[Kimo]

I don't believe it is about "owing" monies after you do your taxes, but instead have at least a $7500 federal tax requirement after deductions. So for instance, lets say you make 75k a year, you would have approx. $10.3k in federal tax liability on that taxable income of 75ik. (0 - 18.5k 10% + 18.5 - 75k 15%) If you take the standard single deductions (say $6300) that would reduce your taxable income to to 68700, which would make your federal tax liability be $9385 (0-18.5k at 10%, + 18.5 - 68.7k at 15%). So for this situation, you have over $7500 in federal tax liability, and thus would be able to claim the full credit.. However, when you start itemizing deductions, say for home interest payments, etc., your overall taxable income continues to drop, and thus your federal tax liability. It is when you get below the $7500 federal tax liability that you cannot take full advantage of the credit.

I am not a financial tax expert. I just believe this is how it works. I could be completely wrong!

 

[Jason Bourne]

As already discussed/debunked in multiple threads, the $7500 tax credit is not limited to what you "owe" when you submit your filing, it is limited by what your total tax is before credits (line 47 on form 1040).

Are you saying that the $7500 tax credit reduces the amount of taxable income that is used to calculate how much tax is owed? If so, that is not how I understand it. To me, that is a tax deduction; whereas this is a tax credit which is applied to the amount of taxes due, based on a person's taxable income.

Just modify your withholding in the year that you know you will take delivery.

But that's exactly my point. If a person has decent odds to take delivery in Dec17 or Jan18, that person wouldn't know until it's likely too late to make a big enough difference in the total amount withheld because there wouldn't be enough time under the modified witholding amount.

 

[Jason Bourne]

However, when you start itemizing deductions, say for home interest payments, etc., your overall taxable income continues to drop, and thus your federal tax liability. It is when you get below the $7500 federal tax liability that you cannot take full advantage of the credit.

I am not a financial tax expert. I just believe this is how it works. I could be completely wrong!

This is exactly my point. Maybe I'm not explaining myself well, or using accurate enough terms. But I emphasized your sentence that is the essence of my point. I assert that many tax payers have less than a $7500 tax liability after all deductions and calculations are made, thus would not get the full benefit of the tax credit. So how does one maneuver that (in a wise way) so that he does get the full benefit.

 

[Kimo]

Unfortunately that I could not answer.

 

[ModelNforNerd]

Ironically, Google is not only the source for answers, but also the reason my wife and I will have enough of a tax liability to qualify for the whole credit when I take delivery.

She works for them. Her compensation package is slanted towards bonuses, which are taxed at 30%. I'll be helping her recoup some of that at the end of the tax year.

 

[Jason Bourne]

Ironically, Google is not only the source for answers, but also the reason my wife and I will have enough of a tax liability to qualify for the whole credit when I take delivery.

She works for them. Her compensation package is slanted towards bonuses, which are taxed at 30%. I'll be helping her recoup some of that at the end of the tax year.

Are you saying that you and your wife chose to not withhold the 30% tax on her bonus at the time it was paid, so that you could apply the $7500 credit against it at the time you file your taxes?

 

[ModelNforNerd]

Are you saying that you and your wife chose to not withhold the 30% tax on her bonus at the time it was paid, so that you could apply the $7500 credit against it at the time you file your taxes?

No, it's automatically withheld at 25% federal and 5% state, making our tax liability much higher than it would have been if that money was counted as regular salary.

Bonus Time: How Bonuses Are Taxed and Treated by the IRS


EDIT: her salary is taxed at roughly 18% federal and 5% state.

So the bonus payments are taxed around 7% more. So we'll be recouping SOME of that when I take delivery of my Model 3.

 

[thefortunes]

I am a CPA (and have also taken this tax credit twice, so far).

As I said above, it is NOT WHAT YOU OWE at time of filing, it is your TOTAL TAXES CALCULATED (line 47 on form 1040) prior to credits that matter.

If your calculated taxes (prior to this credit) exceed $7500, then you will be able to take the credit (discounting any impact of AMT, other credits, etc...).

 

[thefortunes]

Hi all
This is not a thread about how the Federal tax credit works for EV purchasers, or how the phaseout works.

What this thread is asking is, for a person who thinks they might take delivery of their Model3 in 2017, how should that person go about planning their Federal tax liabilities in order to maximize the $7500 tax credit? Meaning, according to Intuit, if your Federal tax liability is less than $7500 for the year in which you receive the tax credit, you don't get a refund of the difference and you don't get to carry it to the next year. I imagine most people are like myself where I may get a refund or owe a grand or two, but I don't think most people in normal years would owe $7500.

Jason, I think your confusion (and possibly that of others who have discussed this in previous threads or may see this one) may arise from the term "tax liability."

Many people think of that as the amount you owe when you do your taxes. The IRS, Intuit and others use this term to describe the total amount of tax on your income, NOT the balance due after withholding and estimated payments.

 

[dsvick]

Are you saying that the $7500 tax credit reduces the amount of taxable income that is used to calculate how much tax is owed? If so, that is not how I understand it. To me, that is a tax deduction; whereas this is a tax credit which is applied to the amount of taxes due, based on a person's taxable income.

But that's exactly my point. If a person has decent odds to take delivery in Dec17 or Jan18, that person wouldn't know until it's likely too late to make a big enough difference in the total amount withheld because there wouldn't be enough time under the modified witholding amount.

This is exactly my point. Maybe I'm not explaining myself well, or using accurate enough terms. But I emphasized your sentence that is the essence of my point. I assert that many tax payers have less than a $7500 tax liability after all deductions and calculations are made, thus would not get the full benefit of the tax credit. So how does one maneuver that (in a wise way) so that he does get the full benefit.

Like @thefortunes said, you need to look at line 47 of your form 1040. That will show you how much you should have paid in taxes based on your income, your deductions, and exemptions. The next section is where all of your credits (including the EV credit) get added together and summed on line 55. You then subtract 55 from 47 and what is left is what your tax liability is for the year - note that that number cannot go below 0. So if you have more in credits than your tax liability you don't get negative liability.

If the total amount that was withheld is greater than your total liability you get a refund, if not then you owe. So adjusting your withholding will not affect how much of the credit you would get. If you want to influence your tax liability you need to do it in the sections above the credits. Some people have suggested moving money from one type of IRA to another, you could tax a disbursement from a 401K, or a few other ways.

No matter what though I would seriously recommend you see a tax professional to see what makes sense for you in your unique situation.

 

[Jason Bourne]

OK thanks guys. So I guess I'm confused. I thought I understood how the tax credit was applied to the tax calculations but I guess not. I'll try to understand better.

Is this an accurate statement?
After your taxable income is calculated (gross income minus deduction and exemptions, that's the AGI right?), your tax liability for the year is calculated based on that number. Subtracted from the year-long tax liability is the $7500 tax credit. Then from the balance, all of the taxes you had withheld throughout the year in your paycheck is applied. That final number, if positive, is what is owed; if negative is your federal refund.

 

[animorph]

OK thanks guys. So I guess I'm confused. I thought I understood how the tax credit was applied to the tax calculations but I guess not. I'll try to understand better.

Is this an accurate statement?
After your taxable income is calculated (gross income minus deduction and exemptions, that's the AGI right?), your tax liability for the year is calculated based on that number. Subtracted from the year-long tax liability is the $7500 tax credit. Then from the balance, all of the taxes you had withheld throughout the year in your paycheck is applied. That final number, if positive, is what is owed; if negative is your federal refund.

That sounds correct to me. Though I haven't applied yet, I have taken other credits. As you can see, adjusting your withholding will have no effect on the amount of the tax credit you can get.

Some things you could do if your tax liability is below $7500:

Move deductions from the year of the tax credit into one of the adjacent years. Such as delay charitable contributions until January in the year after you want to take the tax credit. This will increase your tax liability for the tax credit but the deduction will lower your taxes in the adjacent year. Mostly only good if you itemize.

Recognize income in the year of the tax credit. In my case I'm retired but I can convert traditional IRA money into Roth IRA accounts and create as much tax liability as I want. But you might be able to contribute to a Roth IRA instead of a deductible traditional IRA, contribute less to a 401k this year (and hopefully more next year to make up for that), or try to push any bonuses into the year of the tax credit. Or take some capital gains if they are taxed for you.

Anything that will increase your taxable income will work. But no need to go beyond a safe margin past $7500 tax liability.

 

[dsvick]

OK thanks guys. So I guess I'm confused. I thought I understood how the tax credit was applied to the tax calculations but I guess not. I'll try to understand better.

Is this an accurate statement?
After your taxable income is calculated (gross income minus deduction and exemptions, that's the AGI right?), your tax liability for the year is calculated based on that number. Subtracted from the year-long tax liability is the $7500 tax credit. Then from the balance, all of the taxes you had withheld throughout the year in your paycheck is applied. That final number, if positive, is what is owed; if negative is your federal refund.

Essentially, yes, that's correct. Don't forget that you may qualify for other tax credits that would also get deducted and might reduce how much of the total of all your credits you can use. If you have a tax liability of $8,800 and credits totaling $9,100 you miss out on $300 in credits.

 

[hockeythug]

Hopefully this silly tax credit is not extended and can be put towards health care instead.

 

[S3XY]

Incentivizing a product that will reduce pollution is an investment in the health of every living thing.

 

[alseTrick]

Hopefully this silly tax credit is not extended and can be put towards health care instead.

I'm not going to look up the exact figure, but have there even been 1 million total EV purchases to receive all/part of the tax credit? (I'll use 1 million, though I feel that's probably far too high.)

1,000,000*$7,500=$7.5 Billion

The tax credit program started in 2010? So that's, at most, $1.07B/year.

How many people are going to receive subsidies if RyanDrumpfCare is passed? Is it EVERYONE or just those who purchase insurance outside of their work-offered plans? I don't know off hand. But I do know they say 20 million people have insurance now who didn't have it before.

~1.07B/20,000,000=$53.57

Best case scenario, having no EV tax credit the last few years would've allowed the government to allot $54/year to everyone receiving RyanDrumpfCare (were that already implemented). In reality, that figure is probably significantly less.

Meh.

 

[Lem89]

Can someone explain all this jargon in caveman terms?

I was thinking about withholding less from my paychecks during the year I take delivery (2018) so I could maximize what I owe and apply as much as the available credit as possible. Is this not the case?

 

[thefortunes]

Can someone explain all this jargon in caveman terms?

I was thinking about withholding less from my paychecks during the year I take delivery (2018) so I could maximize what I owe and apply as much as the available credit as possible. Is this not the case?

That is a correct option.

The point that I (and others) are trying to make above is that the credit is NOT dependent on what you owe at the time of filing, but is restricted to the total amount of taxes calculated on your income after deductions (see line 47 of your 1040).