Self Employment Tax and the Clean Vehicle Credit

[joyfuljake]

Hey there, I bought an EV in 2023. A 2023 Tesla Model 3. I’m self employed. I usually owe around $7500 in Taxes each year, however, roughly $5400 of that is in Self Employment Taxes. I bought this Vehicle thinking I’d be able to claim the full $7500 tax credit, however, I am now hearing/learning that this credit doesn’t apply to the self employment tax portion of my tax liability. Is this true? If this is true, what are some of my options into year end as to still maximize this credit? If I sell stocks/crypto and realize a capital gain, will the tax credit be able to cover the amount of tax I owe on those gains? Any other ideas are welcomed as I'd hate for this credit to go to complete waste. However, I also don't want to unnecessarily increase my AGI, which would lead to higher health insurance premiums and also more owed in state taxes. Are there any great or unique solutions to this? Thanks!

[Bsch4477]

You are correct that the credit will not offset self employment tax. If you have a traditional IRA you could consider a conversion to a Roth to use your credit to offset the tax for that transaction. 

[joyfuljake]

Thanks for the response! …and sadly for confirming my suspicions. That’s a great idea but unfortunately I only have a Roth IRA currently and a personal investment account. I’m considering selling some investments to boost my income but it almost seems like a double edged sword that could cost me more in taxes and trouble in the end. 

[stevejen]

This was incredibly misleading from everyone.  From the Tesla dealer, from various IRS related websites, from tax preparers on the EV tax credit.  Why would the IRS not allow this credit be applied to self employment tax? it's a job we're doing regardless of paid via W2 or 1099 status.  Buying a EV car was an encouragement to save our air, + for climate change...they made the credit for a reason.   (Now they're changing it all and letting the dealers deduct it directly in 2024).   Those of us self-employed types in 2023 got scammed.  

[DawnC]

Those tax deductions or credits don't reduce self-employment tax.   When you are self-employed, you have to pay both the employer and employee portions of social security and medicare tax.    If you don’t make estimated tax payments, then you pay these taxes when you file your return.    @stevejen 

[stevejen]

what sense does it make to have a EV credit that is marketed as a credit toward a tax liability .... but in reality it only applies to non-self employment income?   Why was this not clearly stated in the IRS docs/tax preparers/EV car dealers **before** we bought a EV in 2023?   There appear to be A LOT of confused people out there.  

[ThomasM125]

Your EV credit does apply to income tax from self-employment net income, it just doesn't apply to your self-employment tax. Your self-employment tax is not an income tax in the traditional sense of the word. It is actually a contribution to your retirement account with the social security administration. That is why the EV credit cannot apply to it as it is only allowed as a credit against income tax, a restriction that applies to all tax credits. There are no tax credits that apply to social security/self-employment tax . @stevejen