Clarification on Tax Credit

[Ciancagl]

Long post, but hopefully valuable so nobody is disappointed when they don’t get the full EV Tax Credit. For starters, the EV tax credit is a “non refundable” credit, unlike other credits like a Child Tax Credit.

Why is that important? If you don’t have enough “tax liability” in a given year, you don’t get the full credit, and refundable credits are deducted first. The federal taxes you’ve withheld on your paycheck don’t factor in either.

Basic Tax Example (without factoring any tax credits): If your Tax Liability is $10,000 and you withheld $14,000 throughout the year, you get a tax refund of $4,000.

Tax Example with 2 kids: Tax Liability of $10,000, withheld $14,000. Child tax credit (this year $3,600/kid) of $7,200 reduces your Tax Liability to $2,800. $14,000 - $2,800 = your refund of $11,200 (Biden is prepaying $3,600 in advance so at tax time your refund will be $7,600)

Now we’ll factor in the EV credit. That’s deducted AFTER all other credits. So, following the above example, after factoring in the Child Tax credit, your Tax Liability is only $2,800.

The EV tax credit is $7,500. Since it’s a “non refundable” credit, you can’t go past $0…..so now the $7,500 credit you thought you were getting is only $2,800.

Just something to keep in mind!!!! If you typically do pre tax contributions into an HSA account you may want to pass on that next year if you plan to buy so that you have as much Tax Liability as possible. Wouldn’t recommend changing any pre tax 401k contributions though.

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[greenne]

Long post, but hopefully valuable so nobody is disappointed when they don’t get the full EV Tax Credit. For starters, the EV tax credit is a “non refundable” credit, unlike other credits like a Child Tax Credit.

Why is that important? If you don’t have enough “tax liability” in a given year, you don’t get the full credit, and refundable credits are deducted first. The federal taxes you’ve withheld on your paycheck don’t factor in either.

Basic Tax Example (without factoring any tax credits): If your Tax Liability is $10,000 and you withheld $14,000 throughout the year, you get a tax refund of $4,000.

Tax Example with 2 kids: Tax Liability of $10,000, withheld $14,000. Child tax credit (this year $3,600/kid) of $7,200 reduces your Tax Liability to $2,800. $14,000 - $2,800 = your refund of $11,200 (Biden is prepaying $3,600 in advance so at tax time your refund will be $7,600)

Now we’ll factor in the EV credit. That’s deducted AFTER all other credits. So, following the above example, after factoring in the Child Tax credit, your Tax Liability is only $2,800.

The EV tax credit is $7,500. Since it’s a “non refundable” credit, you can’t go past $0…..so now the $7,500 credit you thought you were getting is only $2,800.

Just something to keep in mind!!!! If you typically do pre tax contributions into an HSA account you may want to pass on that next year if you plan to buy so that you have as much Tax Liability as possible. Wouldn’t recommend changing any pre tax 401k contributions though.

Its worth noting that tis is the setup for the current tax credit. Most of the proposals being floated in the recon bill is making the tax credit either refundable(you get the difference back so your tax liability doesn't matter) OR making it able to be rolled forward to the next tax year(similar to the way you can roll solar credits).

Just FYI...

 

[corradoborg]

It's a bit premature to be giving tax advice when none of us even know what year we'll be getting our Lightnings yet, let alone what will be happening with EV tax credits at the time.

The Democrats' reconciliation package currently proposes changing the credit amount to $12,500 for the Lightning (union made in the USA being crediting factors) and making it fully refundable regardless of one's tax liability.

On the other hand, if the EV credit isn't changed Ford may run out the 200k unit cap before we take delivery, reducing and then eliminating the credit altogether.

There are just too many moving parts right now to even think of making tax withholding changes over it. The recent Reuters article suggested that only about 1/10th of us reservation holders may even get our trucks in 2022. It sure would be a shame if people maximized their tax liability in 2022 in anticipation of the EV credit, and then ended up with a massive tax bill instead of a bright shiny new EV truck.

 

[PandaSlash]

Long post, but hopefully valuable so nobody is disappointed when they don’t get the full EV Tax Credit. For starters, the EV tax credit is a “non refundable” credit, unlike other credits like a Child Tax Credit.

Why is that important? If you don’t have enough “tax liability” in a given year, you don’t get the full credit, and refundable credits are deducted first. The federal taxes you’ve withheld on your paycheck don’t factor in either.

Basic Tax Example (without factoring any tax credits): If your Tax Liability is $10,000 and you withheld $14,000 throughout the year, you get a tax refund of $4,000.

Tax Example with 2 kids: Tax Liability of $10,000, withheld $14,000. Child tax credit (this year $3,600/kid) of $7,200 reduces your Tax Liability to $2,800. $14,000 - $2,800 = your refund of $11,200 (Biden is prepaying $3,600 in advance so at tax time your refund will be $7,600)

Now we’ll factor in the EV credit. That’s deducted AFTER all other credits. So, following the above example, after factoring in the Child Tax credit, your Tax Liability is only $2,800.

The EV tax credit is $7,500. Since it’s a “non refundable” credit, you can’t go past $0…..so now the $7,500 credit you thought you were getting is only $2,800.

Just something to keep in mind!!!! If you typically do pre tax contributions into an HSA account you may want to pass on that next year if you plan to buy so that you have as much Tax Liability as possible. Wouldn’t recommend changing any pre tax 401k contributions though.

Nice job - I think this writeup is pretty good. I've seen some other people try to explain it and made it more confusing.

Of course, who knows what the tax code will be next year. But we will all jump off that bridge when we get to it.

 

[Ciancagl]

It's a bit premature to be giving tax advice when none of us even know what year we'll be getting our Lightnings yet, let alone what will be happening with EV tax credits at the time.

The Democrats' reconciliation package currently proposes changing the credit amount to $12,500 for the Lightning (union made in the USA being crediting factors) and making it fully refundable regardless of one's tax liability.

On the other hand, if the EV credit isn't changed Ford may run out the 200k unit cap before we take delivery, reducing and then eliminating the credit altogether.

There are just too many moving parts right now to even think of making tax withholding changes over it. The recent Reuters article suggested that only about 1/10th of us reservation holders may even get our trucks in 2022. It sure would be a shame if people maximized their tax liability in 2022 in anticipation of the EV credit, and then ended up with a massive tax bill instead of a bright shiny new EV truck.

My post was more so to let people, who may not be aware, know the Tax Credit isn’t as easy as getting a $7,500 rebate at the end of the year like some EV dealers make it seem when they show pricing “after tax credit”.

 

[corradoborg]

My post was more so to let people, who may not be aware, know the Tax Credit isn’t as easy as getting a $7,500 rebate at the end of the year like some EV dealers make it seem when they show pricing “after tax credit”.

I get it, but I'm just making clear that by the time our F-150s are available, that may or may not be the case. It may be fully refundable, or it may not even exist any longer. No sense in planning for just one possibility when the possibilities are in complex flux.

 

[shutterbug]

My post was more so to let people, who may not be aware, know the Tax Credit isn’t as easy as getting a $7,500 rebate at the end of the year like some EV dealers make it seem when they show pricing “after tax credit”.

One other thing that hasn't been discussed on this forum (I don't think). Currently, there a 30%(up to a $1,000) for acquiring and installing charging infrastructure. It's currently is set to expire on 12/31/21. But if they extend it again (like they did last year), some people may need enough tax liability to take advantage of up to $8,500 in tax credits.

 

[Ciancagl]

One other thing that hasn't been discussed on this forum (I don't think). Currently, there a 30%(up to a $1,000) for acquiring and installing charging infrastructure. It's currently is set to expire on 12/31/21. But if they extend it again (like they did last year), some people may need enough tax liability to take advantage of up to $8,500 in tax credits.

Is that a federal credit or state specific? I hadn’t seen that!

 

[shutterbug]

Is that a federal credit or state specific? I hadn’t seen that!

Federal
https://www.irs.gov/pub/irs-pdf/i8911.pdf

 

[astricklin]

My post was more so to let people, who may not be aware, know the Tax Credit isn’t as easy as getting a $7,500 rebate at the end of the year like some EV dealers make it seem when they show pricing “after tax credit”.

The other thing to remember is that if you are not paying cash for the vehicle, you will need to be approved for financing the purchase price before the incentives and also you will have a monthly payment based on the pre-incentive amount. Now my understanding is that Ford credit will allow you to make a lump payment once you receive the tax credit and then adjust your monthly payments according, but from time of purchase till when you get your tax return, you will have to be able to make the higher payment.

 

[MalthusUNC]

Another suggestion I've seen is that if you don't have enough tax liability in the year you get the credit (assuming everything stays the same) and you have a Traditional IRA, you can convert some or all of that to a Roth IRA to raise your tax liability for that year (so that you can use all of the tax credit). As always, consult with your tax advisor, and don't trust some rando on the internet!

 

[Ciancagl]

Another suggestion I've seen is that if you don't have enough tax liability in the year you get the credit (assuming everything stays the same) and you have a Traditional IRA, you can convert some or all of that to a Roth IRA to raise your tax liability for that year (so that you can use all of the tax credit). As always, consult with your tax advisor, and don't trust some rando on the internet!

Yup, but PLEASE don’t stop contributing to your company sponsored 401k to get an extra couple grand in the form of a tax credit!

But the post above does make a good point. Who knows when we’ll get our trucks and what the legislation will be by that time. Just better to be cognisant of how it actually works now so you’re not disappointed in the next 18-24 months, and don’t do anything drastic with your pre tax contributions until we know more

 

[tankengr]

Another suggestion I've seen is that if you don't have enough tax liability in the year you get the credit (assuming everything stays the same) and you have a Traditional IRA, you can convert some or all of that to a Roth IRA to raise your tax liability for that year (so that you can use all of the tax credit). As always, consult with your tax advisor, and don't trust some rando on the internet!

I'm retired and living on minimal taxable income. Each year since I added solar panels to my home, I have been converting just enough of my traditional IRA to my Roth IRA to put me at the top of the lowest tax bracket. With the solar tax credit, you can carryover the credit to subsequent years. However, with the electric vehicle credit (as currently written) you have to use it all in the year of purchase. So, I'll just have to make a large enough conversion to my Roth to give me enough tax liability.

 

[Brian Head Yankee]

Or, simply change the deductibles from your paycheck to artificially raise you liability at the end of the year.

(I say artificially because the money goes in your pocket throughout the year. Getting a refund is simply getting your money back after the govt used it interest free. Be smart and pay the minimum amount from your paycheck throughout the year.)

 

[GarageMahal]

Or, simply change the deductibles from your paycheck to artificially raise you liability at the end of the year.

(I say artificially because the money goes in your pocket throughout the year. Getting a refund is simply getting your money back after the govt used it interest free. Be smart and pay the minimum amount from your paycheck throughout the year.)

This doesn't work. Withheld amount has no impact on your tax, just when you pay it.

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