How will the $7,500 tax credit work?

[fredevad]

Will the $7,500 tax credit come off at the dealership so that I only have to finance $40K - $7.5K = $32.5K? Or will I have to finance $40K and wait until April 15th to have the $7,500 taken off my taxes?

(Yes, I'm just assuming $40K for the Volt just for the sake of argument).

Thanks,
- Fred

[dbK]

It almost certainly will be the latter.

[dbK]

So, I just read the text of the bill and it's a non-refundable credit (meaning if you only have a tax liability of $5,000 and up to $5,000 of withholding/estimated payments, you only get $5,000).

Sweet.

[omnimoeish]

Sorry, I'm not savvy on this point, I still don't understand this. Is it just taking $7,500 off your taxable income, or does it essentially add $7,500 to your tax return?

[dbK]

There are two ways to reduce your tax liability: deductions and credits.

A deduction is something like mortgage interest; it is a dollar for dollar decrease in your taxable income, resulting in a tax benefit of deductions times nominal tax rate-- i.e., if you have $1,000 of mortgage interest paid, and you're in the 25% tax bracket, you pay $250 less tax.

A credit is a dollar for dollar tax decrease. That means that the amount of the credit lowers your tax bill at 100%. So, if you owed $1,000 and had a $100 credit, you would have to send the IRS a check for $900.

There are two types of credits: refundable and non-refundable. A refundable credit is one that you will get the full benefit of regardless of your tax liability. An example of this is the earned income credit (EIC). Two examples: First, you owe $1,000 of tax and a $100 refundable credit. That would reduce your tax owed to $900. Second: You have $1,000 of tax and a $2,000 refundable credit. Your tax owed would be reduced to zero, and the remaining $1,000 of the credit would be sent to you as a tax refund. Refundable credits are a very direct and visible form of wealth redistribution.

Non-refundable credits are the opposite. They can not reduce your tax liability below zero (meaning you can not receive more than you have paid in). Examples of non-refundable credits are the plug-in car credit, the Hope/Lifetime Learning Credit/etc. Some more examples: First: You owe $1,000 of tax and have a $100 non-refundable credit. Just like above, with the refundable credit, your tax liability becomes $900. Second: You owe $1,000 in tax and have $2,000 worth of non-refundable credits. You can only use $1,000 of those credits to bring your tax liability to zero. The additional $1,000 is not paid back to you.

I am an accountant, but I am not your accountant. This is not tax advice, nor should it be used as such.

[omnimoeish]

Thanks dbk. I'm glad that's finally cleared up, I think there were a few other people not sure how it was going to work. Impeccable clarity for an accountant

[GearheadGeek]

If you buy a Volt and the $7500 tax credit is in place and you're certain that you qualify for it, you need not wait until 15 April to get your money back. (In fact, it's kinda stupid to wait until 15 April to file if you're getting a refund... I figure my taxes in January and only wait to file until April if I have to pay more... I file immediately if I'm getting a refund.)

You can adjust your withholding for the remainder of the year to keep some (or all) of the money that will be credited off your tax liability when you file your taxes. This sort of thing is best discussed with your tax professional if you don't understand how it works very well, because if you reduce your withholding to the point that you end up owing TOO much, there are penalties to be paid. My goal is always to owe the IRS at tax time, but to keep what I owe them under $100 or so.

[fredevad]

Thanks dbK.

Well, that pretty much means that for me, I most likely won't be able to afford a Volt for at least a first few years (at least not at $40K). The loan payments and extra insurance won't offset the fuel savings enough.

I expected to pay a little more for helping to protect the environment, but I can't afford it for a while. No matter when I file my tax return, 1) I still end up with a 40K loan, and 2) I already get a tax refund because of mortgage interest, so I won't see any of the $7,500 anyway.

Very disappointing - but better I know this now than at the dealership. Thanks for the answers.

NPNS? PTHNS
(Price Too High, No Sale)

[LampCord]

You can enjoy your tax credit right away. If you already pay over $7,500 a year in taxes you simply reduce your withholdings by $625 / month immediately. At the end of the year it will be a wash and their will be no penalty.

I'll break it down in case its not clear. And I'll use round numbers for the fractionally impared.

Lets say you currently make $80,000 / year and after deductions and everything else, your net tax liability is $8,400. Currently, you have $700 / month withheld by your employer which at the end of the year adds up to $8400 and you get no refund and have no taxes due.

On January 1, 2011, you take delivery of your Chevy Volt. The loan after all other charges, trade in, sales tax, etc. is for $40k. Your monthly payment is $800.

You immediately contact your employer and tell them you want your withholdings reduced by $625 / month for this year only. Now, you will have only $75 / month withheld and your paycheck will be $625 more than normal each month.

At the end of the year, your initial tax liability will be $8,400 just like last year (assuming all else is the same, which it never is). But you will get a $7,500 tax credit reducing your liability to $900 this year and this year only. Since you had $75 / month withheld, that comes to $75 * 12 or $900 total withheld. Meaning, once again you have a net taxes due of $0.

Now, the next year, you're back to your $700 / month withholdings. And your $800 / month payment.

So you don't really have to wait till April 15th of the following year to get your credit.

The first year will be great because you'll pay $800 / month but your paycheck will be $625 a month more than usual for a net cost of only $175 / month. The question you will have to ask yourself is, can you afford the $800 / month for years 2-5 of the loan?

The problem I have with all of this is it is essentially regressive. If you only make $40k / year and only pay $3,000 a year in taxes, you kind of get screwed. I'd prefer a refund to a credit. I think it would be more fair.

[fredevad]

LampCord:

Yep, the years 2 - 5 with an $800/month car payment is the killer problem. Even with gas at $3 a gallon, my estimated fuel savings is $144 a month (Pending GM's official MPGe ratings). Plus, I don't know how much my insurance is going to go up a month.