Tax Credit Clarification

[SageBrush]

So let's say I have a Fed tax liability of exactly $7500 and my employer withholds a total of exactly $7500 over the year. If I purchase the vehicle in that said year and apply for the tax credit of $7500 I will get a refund check for $7500. Correct?

Correct, presuming other tax credits are also not in play. To see how this might sort out, consider this example:

Year one:
X income
Y tax liability, equal to 7500
2000 credit for dependents
Y witholding
--
You get $2000 refund



Year two:
X income
Y tax liability, equal to 7500
2000 credit for dependents
Y witholding
7500 EV credit
---
You get $7500 refund

 

[chronopc]

So let's say I have a Fed tax liability of exactly $7500 and my employer withholds a total of exactly $7500 over the year. If I purchase the vehicle in that said year and apply for the tax credit of $7500 I will get a refund check for $7500. Correct?

The short answer is yes.

 

[gregincal]

Not sure what you mean by delaying until 2019. He has to take the credit for the tax year the car was put into service. So let's say he has at least $7,500 in tax liability. He can either chunk that up over the course of 2018 via exemptions and get 0 back at refund time, or he can get $7,500 back in April 2019. Rereading his first post it seems like he's simply wanting to get more money during 2018 with the expectation that his income will rise in 2019 and he won't need the extra padding the tax credit provides. If that's what you're saying then I think I'm on the same page, however your line about delaying to 2019 has confused me.

Delaying buying the car until he had more money.

 

[gambit48]

Maybe not, since I'll hazard a guess that the leading reason for low tax liability is unemployment.
That said, self-employed small businesses like I own are well advised to learn the basics of tax avoidance. It ends up being a lot of money and usually implies low tax liability.

Yes. It's a fine line and/or double edge sword. The typical goal of a small business (from a tax standpoint) is to find whatever you can that is arguably tax deductible to make your income as small as possible. There's a lot of grey area and it's easy to go over the line obviously, but let's not get into that. The double edge sword is when you apply for a loan or otherwise need to show your income using your tax return. Then, that "artificially" low income becomes a bad thing. But yes, it's in the interest of self-employed small business owners to know as many tax tricks as they can so they can manipulate things as needed. Unless you talk to your tax pro all the time, they're not always going to be able to suggest maneuvers at the exact time you need them or in time to make them.

 

[SageBrush]

Yes. It's a fine line and/or double edge sword. The typical goal of a small business (from a tax standpoint) is to find whatever you can that is arguably tax deductible to make your income as small as possible. There's a lot of grey area and it's easy to go over the line obviously, but let's not get into that. The double edge sword is when you apply for a loan or otherwise need to show your income using your tax return.

My "issues" are different.

I shelter income through increased retirement savings. This does not actually affect my credit/debt games at all, but it does mean that my monthly disposable income is voluntarily restricted. As an aside, while employed people tend to only consider income taxes, small business also save payroll and individual marketplace obamacare costs with the shelter.

For years I've been paying about 2% of my income for (fed+state+SS+health) by keeping my "w-2" at about 35k a year. Purchases like the Model 3 are paid from savings, but tax credits like the EV one are outside of my reach without causing commensurate taxes somewhere else.

I apologize if all this seems horribly off-topic. My intent is to emphasize that increasing taxable income in order to qualify for the EV credit has to be balanced against whatever other side-effects might occur. You need a workable understanding of taxes to play the game.

 

[wdolson]

Long time lurker, first time poster. Been lusting after Tesla ever since seeing Roadster as one of the top points buys in Full Tilt store almost a decade ago. Moved to California 3 years ago this month in part because of Tesla 3. My tax liability though is below $7,500. I'll be taking the delivery of the $35K base model in 2018 (Feb-Apr) to get as close to $7,500 as I can.

One of the possible options I've been looking into, to ease the financial burden next year, has been increasing the number of exemptions that I claim to decrease the amount withheld from each paycheck as much as possible. The extra funds would then go towards the increase in monthly car payments/insurance. Instead of receiving a refund in April 2019, the goal is to spread it out over 2018 with the expectation of higher earnings in 2019 compared to 2018 - thus directing the extra cash infusion to a time when it's more needed.

However, I have run into some conflicting information in my research online and of this forum:

1) $7500 Credit and Adjusting Tax Withholding 02/17/2014:


2) Tax Credit Clarification 06/14/2016:


3) How to plan for maximizing tax credit? 03/14/2017:


Thoughts?

I own my own business and have to send in quarterly withholding rather than do the W-4 with a paycheck. I believe you are attempting to do the same thing I did in 2016. I knew my tax liability was going to be pretty much wiped out if not completely wiped out that year because of the credit, so I didn't send them anything for withholding for three quarters and then sent in a little the 4th quarter to make sure I didn't get penalized. When I did my taxes in April of this year I ended up getting my Q4 withholding back.

When I was on a W4 years ago I did have something going on that I knew was going to reduce my taxes one year (though I can't remember what right now, it was early in my career). I did up my exemptions for a year and got more back per paycheck. The next year I had to remember in January to change it back or I was going to be screwed the 3rd year at tax time!

You will still have money taken out for Social Security and Medicare, but you can increase exemptions on the W-4 to reduce your income tax withholding. It's easier to do when you own your own business, but it can be done on a W-4 too.

 

[wdolson]

I still think OP is confused about tax liability since it has nothing to do with collecting the eligible tax credit earlier than the next tax filing, but regarding your comment:

The IRS expects periodic taxes due. So e.g in this example of taxes due:
Q1: 500
Q2: 500
Q3: 500
Q4: 1500

You might think that no tax payments are required but that would be incorrect. Taxes are due for for quarters 1-3.
W-2 workers are probably safe from this detail, but the self-employed may wish to be a little more cautious.

It might even be true that this situation:
Q1: 500 - 2000 credit
Q2: 500
Q3: 500
Q4: 500

Requires tax payments in the last three quarters. A lot would depend on the mood of the tax guy auditing your taxes.

Scroll down to the middle of this page:
Here Are the Odds of An IRS Audit -- The Motley Fool

If your gross income is between $25K and $200K the odds you're going to get audited are less than 1%. The IRS concentrates on those making big bucks and to a lesser extent those claiming to make very little.

You are also unlikely to get audited until after you file your taxes for a year. They might flag an account that has a sudden drop in withholding for further review, but after you file your taxes, the reason for the sudden decline will be obvious and they will likely do nothing more. You won't even know about it. As long as your withholding goes back to where it was the following year, you did nothing wrong and there would be no need for an audit.

 

[wdolson]

Giving him the benefit of the doubt, but we always ask, since it's unlikely that someone with an income low enough to pay < $7500 in taxes will buy a > $35k vehicle.

A large percentage of cars out there today cost more than $35K. A Subaru Outback 3.6R Limited with no extras beyond the trim package is $36K. The Ford Fusion Platinum has a base price over $36K too.

And lots of people with tax liabilities less than $7500 are buying cars in that range. My best income year ever my tax liability was around $7600 and my budget was $30-$40K before I found Tesla. I happen to be lucky enough to have essentially no debt and no kids, which makes my extra income a bit larger than most people in my tax situation. A Model S was a difficult stretch of my budget, but a Model 3 would have been financially fairly easy for me.

 

[dgpcolorado]

...Major props to anyone who manages to be able to afford the car and owe the IRS less than $7,500.

It isn't as uncommon as it seems to many. I realize that TMC skews toward the very high income, but some of us are retirees — I retired young at age 45 — and we can have low incomes along with respectable savings. I have a tiny income because that is all I need to live comfortably but I purchased my car using savings. Income is not the same thing as wealth, although the two are correlated for many.

I never earned enough in my entire career to come close to a $7500 tax liability. However, I was thrifty and saved and invested with single-minded focus. It is a different approach to life and now I can spend some of those savings on frivolous toys, such as a Tesla.

 

[chronopc]

It isn't as uncommon as it seems to many. I realize that TMC skews toward the very high income, but some of us are retirees — I retired young at age 45 — and we can have low incomes along with respectable savings. I have a tiny income because that is all I need to live comfortably but I purchased my car using savings. Income is not the same thing as wealth, although the two are correlated for many.

I never earned enough in my entire career to come close to a $7500 tax liability. However, I was thrifty and saved and invested with single-minded focus. It is a different approach to life and now I can spend some of those savings on frivolous toys, such as a Tesla.

Wow, how did you manage to be able to retire at 45? I would like to do that.

 

[dgpcolorado]

Wow, how did you manage to be able to retire at 45? I would like to do that.

Thrifty living, both before and after retirement; in the last ten years before retiring I was saving a third to a half of my modest income. It adds up over time, although I was helped by the '90s bull stock market. However, I am single and retiring at 45 isn't practical for those with families, unless they are very wealthy. Since retiring I've been doing a lot of volunteer work, which I find more fulfilling than I did my career.

 

[chronopc]

Thrifty living, both before and after retirement; in the last ten years before retiring I was saving a third to a half of my modest income. It adds up over time, although I was helped by the '90s bull stock market. However, I am single and retiring at 45 isn't practical for those with families, unless they are very wealthy. Since retiring I've been doing a lot of volunteer work, which I find more fulfilling than I did my career.

Good job on being able to make that decision. I can definitely see doing volunteering work as more fulfilling. If I ever win the lottery, that's what I'll do.

 

[kort677]

It isn't as uncommon as it seems to many. I realize that TMC skews toward the very high income, but some of us are retirees — I retired young at age 45 — and we can have low incomes along with respectable savings. I have a tiny income because that is all I need to live comfortably but I purchased my car using savings. Income is not the same thing as wealth, although the two are correlated for many.

I never earned enough in my entire career to come close to a $7500 tax liability. However, I was thrifty and saved and invested with single-minded focus. It is a different approach to life and now I can spend some of those savings on frivolous toys, such as a Tesla.

you can apply the tax credit to tax liabilities from investment income

 

[dgpcolorado]

you can apply the tax credit to tax liabilities from investment income

I don't have enough taxable income or taxable investments to make that worthwhile.

For my LEAF purchase years ago, I converted some traditional (tax deferred) IRA to Roth IRA but that was hugely tax inefficient because it raised my tax bracket. In effect, I got back from the credit taxes I never would have had to pay in the first place. Now my traditional IRA is so depleted that there is no point in doing another conversion to try to raise my income for tax credit purposes, other than a small amount (perhaps I can claim most of the ¼ credit, $1875, if I do that). That traditional IRA will be long gone before I get to age 70½ and face Required Minimum Distributions; I've been drawing on it gradually over the last two decades. In a couple of years it will all be Roth IRA.

 

[kort677]

I don't have enough taxable income or taxable investments to make that worthwhile.

For my LEAF purchase years ago, I converted some traditional (tax deferred) IRA to Roth IRA but that was hugely tax inefficient because it raised my tax bracket. In effect, I got back from the credit taxes I never would have had to pay in the first place. Now my traditional IRA is so depleted that there is no point in doing another conversion to try to raise my income for tax credit purposes, other than a small amount (perhaps I can claim most of the ¼ credit, $1875, if I do that). That traditional IRA will be long gone before I get to age 70½ and face Required Minimum Distributions; I've been drawing on it gradually over the last two decades. In a couple of years it will all be Roth IRA.

taking monies for a purchase like a car from a retirement account is rarely a sound financial move.

 

[BluestarE3]

taking monies for a purchase like a car from a retirement account is rarely a sound financial move.

Unless you're already retired, haven't tapped into your IRA/401K yet and getting close to the age for mandatory distributions.

 

[kort677]

Unless you're already retired, haven't tapped into your IRA/401K yet and getting close to the age for mandatory distributions.

yes you're correct however the poster who brought this up isn't close to that age.

 

[dgpcolorado]

taking monies for a purchase like a car from a retirement account is rarely a sound financial move.

Retiring young is also not a sound financial move for most, but it can be done if one is careful and has sufficient assets to generate enough income to cover expenses. Yes, buying EVs is a frivolous expense that has to be budgeted carefully unless one is quite wealthy. It is an expensive hobby, to be sure!

Nevertheless, the assumption by many, that having an income high enough to qualify for the tax credit is necessary for an EV purchase, is not true for those with low incomes and high savings. This includes some retirees IME.

 

[spacemnspiff]

Do we have an update to the tax roll off for Tesla? The delivery estimate for the base model for me is May 2018 and for the premium version is Feb 2018.
Is it realistic for me to expect to get a full $7500 credit for May - July time frame?

 

[MP3Mike]

Do we have an update to the tax roll off for Tesla? The delivery estimate for the base model for me is May 2018 and for the premium version is Feb 2018.
Is it realistic for me to expect to get a full $7500 credit for May - July time frame?

Nope, no update of counts.

Realistic to get the full credit May-June? Yes. In July? No, it will likely be a $3,750 credit by then.