Going Federal Tax exempt in 2023 to take advantage of Ev tax credit

[Rk518]

Trying to figure out how to take full advantage of the $7,500 EV tax credit as I’m aware it’s non refundable and wondering if going federal tax exempt  on my W4 for the year will help do that. 

If I only work with one employer and make  $72,000 in 2023 and take the standard deduction of $13,850 my taxable income is $58,150. 

Based off my calculations for the 2023 tax bracket I would have a tax liability of $8,100. 
I get paid monthly and each month my Federal Tax withheld is $700. My yearly Federal Tax withheld by my employer would be $8,400 ($700 x 12)

Situation A

If I claim Federal Tax exempt for the 2023 and keep that $8,400 throughout the year. Then when filing taxes in 2024 I would owe the full $8,100. But with the $7,500 EV Tax credit I would owe the difference of $600 ($8,100 - $7,500). 

Situation B

If I continue to have Federal Tax withheld I will instead end up getting a refund of $300 ($8,400 - $8,100) forfeiting the $7,500 tax credit all together because I wouldn’t owe anything. Hence leaving net -$7,500 compared to Situation A. 

If I understand correctly, in my situation going exempt could mean the difference between getting the tax credit or not hence Situation A would be ideal? Am I missing something here?

[VolvoGirl]

You are half right.  Forget about the withholding.  That comes later.  First you figure the tax on your income.   The EV credit will reduce the tax liability (not the tax due).  It can only reduce the tax to zero.  Then your withholding is subtracted.   If the tax liability is zero you will get back all your withholding.   

Situation A is right.

But situation B is wrong.  Your tax is 8,100.   Minus the 7,500 EV credit leaves 600 tax.  THEN  you subtract the 8,400 withholding to give you a 7,800 Refund.  

[Rk518]

Got it so the EV tax credit gets subtracted from the tax liability before the withholding is accounted for not after, so the withholding is refundable even though the tax credit isn’t?
So if I wanted to have to have more money upfront throughout the year since I know the tax credit will cover most of my tax liability, would there be any drawbacks to going exempt for the year, besides having to save $600 on side to pay back? 

[Vanessa A]

The withholding is refundable only when you have a tax liability that is less than your withholdings. So, if a non refundable tax credit lowers your tax liability to $0, then all of your withholdings would be refunded to you.

So, yes, if you wanted to have more money up front and are sure you will qualify for the EV credit that will bring your tax liability down to $600, you could potentially not have taxes withheld.  However, this is very risky as tax laws change and so do the laws for tax credits.  

If, for some reason you would end up not getting the EV credit next year, you would end up owing what you didn't have withheld plus penalties for failure to pay enough taxes throughout the year.