EV Tax Credit Calculation

[Artlive87]

Hi All,

I know that EV Tax Credit is not refundable, but how does it work in the example below?

Let's assume that Person 1 works as a Project Manager, and his/her monthly salary is $5,000 Gross; after withholding based on his/her marital status, the take-home amount is $3,800. So by the end of the year, he/she will have approx a $13,000 withholding. Said IRS will say..ok, you owe me $13.000, and you paid it already(the amount was withheld), but you filed an EV Tax credit, so it means that you overpaid me $7,500, so I will send it back to you.
Is that work like that? or will the person not get anything?

[ThomasM125]

First of all, you wouldn't have more tax withheld than your income, as mentioned in your example. But the tax withheld would not factor into the use of the EV credit. It would simply be applied against your income tax. In your example, there is no income tax so no credit would be available in the current year. Since the taxpayer paid in $13,000 and had no income tax, $13,000 would be refunded.

[Artlive87]

I did not get it. So based on my example Person will have approx $60k AGI, and from that amount, 13k will be withheld. Why should he/she get a 13k refund? So it means that the EV tax credit makes no sense for W2 employees with the correct W4?

[VolvoGirl]

No.  Forget about the withholding right now.  It first figured the tax on the 60,000 or actually the tax on your taxable income (AGI - Standard Deduction).   Then you subtract the EV credit to reduce the tax, but only to zero.  If the tax is zero you get back all your withholding.   

[Artlive87]

Ok, let me show you this example.

YTD is $79k

Taxes

$13,000

Federal Income Tax

$4,500

Social Security

$4,500

Medicare

$1,150

California State Income Tax

$1,900

California State Disability Insurance

$800


How, in this case, the EV tax credit will be calculated?

[VolvoGirl]

You have to fill out a tax return.  There are many other factors like filing status, and actual amount in W2 box 1.  The W2 usually does not match the paychecks.  Only the federal withholding in box 2 affects it.   

Here is a blank 1040.  Fill it out by hand to test and see how it works

https://www.irs.gov/pub/irs-pdf/f1040.pdf 

Instructions

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

Current year EIC and Tax Tables  https://www.irs.gov/pub/irs-pdf/i1040tt.pdf

[JohnB5677 · Accepted solution]

I think your question was posted incorrectly.  I "think" you meant your example had $50,000 Gross, and $38,000 take-home.  The withholdings are not relevant to this issue.

• If your example is single, they would get $ 12,900 as standard deduction.
• That would make taxable income ($50,000 - $12,900 = $37,100)
• The tax on $37,100 is $4,324.
• Even if you got an EV credit of $7,500, you could only use $4,324.

If the example was married filing jointly

• If your example is married, they would get $ 25,800 as standard deduction.
• That would make taxable income ($50,000 - $25,800 = $24,200)
• The tax on $24,200 is $2,490.
• Even if you got an EV credit of $7,500, you could only use $2,490.

Unfortunately, you cannot carry this credit to any other years.

@Artlive87

[Artlive87]

Thank you for the real calculation example. This tax Credit is like a scam) Not much benefit from it if you are married. 

[Opus 17 · Accepted solution]

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@Artlive87 wrote:

Ok, let me show you this example.

YTD is $79k

Taxes

$13,000

Federal Income Tax

$4,500

Social Security

$4,500

Medicare

$1,150

California State Income Tax

$1,900

California State Disability Insurance

$800


How, in this case, the EV tax credit will be calculated?

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The federal withholding is only part of the question.  You need to know the federal tax liability.  That's the amount of tax you owe to the government, regardless of withholding.

For example, if you had $4500 withheld and you expect a refund of $500, your liability was $4,000.  Or, if you had $4,500 withheld and you expect to owe an additional $500, then your liability was $5000.

The EV credit is up to the amount of your federal liability.  The rest is carried forward.  For example, if you had $4500 withheld and you originally expected a refund of $500 because your liability was $4,000, adding the EV credit would apply $4000 this year, and you would get a refund of $4500--all your withholding, since your liability is now zero.

State and other taxes and fees don't enter the equation at all. 

[Opus 17]

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@Artlive87 wrote:

Thank you for the real calculation example. This tax Credit is like a scam) Not much benefit from it if you are married. 

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The EV credit is a wealth transfer from the general taxpayer to high-income taxpayers who can afford to own and maintain 2 or 3 cars.  I'd love an EV but I do too much extended driving so it would have to be my second car, meaning I have to be wealthy enough to n to only buy it, but pay maintenance and insurance on two cars.

The trick (if you are planning for the future) is to find a useful way of temporarily increasing your income.  For example, if you have retirement funds in a traditional pre-tax 401k, 403b or IRA, you could do a Roth IRA conversion to use up the credit.  If you get a $7500 credit but can only use $2500 of is, you could convert $25,000 of your retirement funds to a Roth account.  Future withdrawals will be tax-free, and there won't be any tax on the conversion because of the EV credit.

Or, you could take a bonus, deferred compensation, or sell some stocks at a large gain to lock in the gain tax-free.

[dsolomatin]

I ordered and paid for my Tesla Model 3 Long Range prior to the MSRP going up. My total cost before taxes was 53600.00 Turbo Tax is telling me Tesla is no longer eligible. How do I get around this?

[JohnB5677]

The Tesla Credit was phased out in 2020.  One issue seems to be that it is not manufactured in North America.

Additional Requirements for EVs Under IRC 30D

For all new electric vehicles that qualify under IRC 30D, you must also certify that:

• The vehicle is a plug-in electric vehicle drawing significant power from a battery with a capacity of at least 7 kilowatt hours or is a new qualified fuel cell motor vehicle as defined in IRC 30B(b)(3)
• The vehicle is manufactured primarily for use on public roads and has at least 4 wheels, with an exception for vehicles that operate on rails
• Final assembly occurred in North America

[dsolomatin]

I don’t believe this is accurate because Tesla model three are manufactured in Fremont California. Can you investigate further?

[JohnW152]

If you purchased your Tesla in 2022, it wouldn't be eligible for the credit.

Please see the IRS' Manufacturers and Models for New Qualified Clean Vehicles Purchased in 2022 and Before page for more information.

@dsolomatin

[Opus 17]

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@dsolomatin wrote:

I don’t believe this is accurate because Tesla model three are manufactured in Fremont California. Can you investigate further?

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For each new model of EV, the credit is gradually phased out based on sales.  The idea is to have an incentive to buy new models, so that manufacturers will innovate and create new models.  The idea is not to create a forever credit.  So as each new model passes a sales target, the credit is phased out.  Because Tesla is the most popular EV and has been sold the longest, it has passed all its phase-out sales targets.