$7,500 Federal Tax Credit for Purchase of Electric Vehicle

[AmyC]

I used the desktop version and was able to choose model year 2020. The online version said it wasn't ready yet. Time is the answer here.

[botondkopacz]

What a common a simple question yet no answers on this.

So lets say that my for 2020 I ended up with the need to pay $20k taxes. My paycheck was set in a way that my witholdings were in line with my income, so by end of 2020 I own $0 to IRS because of paycheck witholdings.

With the $7500 credit, it would mean that IRS will threat this in a way that $20000 - $7500 = $12500 the amount of tax that I should pay and refound the $7500? 

Thanks,

Botond

[Anonymous_]

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@botondkopacz wrote:

With the $7500 credit, it would mean that IRS will threat this in a way that $20000 - $7500 = $12500 the amount of tax that I should pay and refound the $7500? 

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Yes.

Based upon your fact pattern, you had a tax liability before the credit of $20,000.

The $7,500 tax credit would reduce that tax liability dollar for dollar, resulting in a tax liability of $12,500.

The primary problem here is that many taxpayers conflate tax liability with tax withheld (or estimated payments made) whereas they are not, in almost all instances, the same.

[JohnB5677]

Yes you are correct.  You can subtract Tax Credits from the amount of tax you owe.   As opposed to a Tax Deduction that will reduce your income before you figure the amount of tax you owe. 

A deduction will reduce your tax by reducing the amount of money you are being taxed on.

A Credit will actually reduce the tax.  In some cases it will generate a refund.

@botondkopacz

[dolmanj]

Hi!

Based on your answer, it looks like the EV non-refundable tax credit it used first, before any withholdings are applied.  The rest would be refunded (if credit took care of all liability.)

I just want to double check that this is correct, as I have heard the opposite might be true:  That the withholdings are used first, and if there is anything left over that is still owed, the EV Federal Tax Credit would fill in that amount but no more.

Can we confirm the first option is in fact the case, and how can we make sure?  Is there any government website that confirms the order of which is applied first?

Thanks!

Joe

[Critter-3]

The CREDIT is used first to lower the tax bill.   Then if you have any tax liability left over the  withholdings are applied and the excess  refunded.   If you simply read the form 1040 line by line you will see how this happens.  

[AbrahamT]

Here, let me show you visibly how this works. See here

So, in this example, your total tax was 1,844.00. The EV credit wipes out the tax liability to 0. Youre withholdings will be completely refunded to you because the credit wiped out your tax liability to 0 already. Depending on what line 18 calculates to, that's going to be the amount that will be determined how much from your withholdings you will get back. For example, if Line 18,  would have been 10,000, your credit would have been 7,500(line 20). making Line 21 to be 2,500 tax liability. So,

in essence, the 4,000 from line 25 would wipe out your complete tax liability and thus you would only be refunded 1,500 (line 35A).    

[dolmanj]

Hi!  

Actually after you suggested to review the tax form itself, I did. 

Now I can confirm that yes it is indeed correct that non-refundable credits will be applied first. It is clear on the form. 

Thanks!

Best regards,
Joe