[Evan D]

The full $7500 tax credit is a pretty big factor in me being able to afford this car, but I'm having a lot of trouble understanding how it works because every explanation I see online is confusing to me. Some wording I see makes it sound like you will only get the credit or part of the credit if you owe the govt money at tax time. But don't most people get a refund at tax time? I feel like more people would talk/complain about it if that's how it worked.

Or do you get the full EV credit as long as you paid more than $7500 in income tax for that whole year, regardless of whether you owe or are getting a refund at the end of the year?

Can someone please explain it to me like I'm 5 years old?

 

[Evan D]

Just to throw out an example. Let's say someone makes 50k/yr. A quick Google search says a person making that much will typically pay roughly $10k in income tax over the course of the year. So would that mean that person will get the full EV credit even if they are already getting a small refund when they do their taxes?

 

[PolkNole]

You get UP TO $7500 off your tax bill in the tax year you bought the car. If you owed less than $7500 in that year, it’s only good for that amount.

Do not confuse what you net owe or get back with your total tax bill. What you paid in all year is irrelevant.

in other words, say you owed exactly $7500 in 2022 taxes. And you guessed right and withheld $7500 in taxes for the year. Then you’d owe no additional funds, or get any back, at year end.
And say you bought a Polestar in 2022. In this example, since you owed $7500, and you withheld $7500, and your net owing is $0, then because the tax credit wiped out the $7500 you owed, you would get a $7500 check back from Uncle Sam.

 

[HernameisElektra]

I only got back $2,200

 

[Belac]

As @PolkNole mentioned, it is 100% based on tax liabillity. If you are liable for $7500 or more of federal taxes, you qualify for the full refund. If you are liable for less, you qualify for less (if your federal tax bill is $5000, you only qualify for $5000 of EV tax credit). It is independent on if you owe money or get money come tax time, that part is based on your withholding's and deductions.

 

[Z9in]

You get UP TO $7500 off your tax bill in the tax year you bought the car. If you owed less than $7500 in that year, it’s only good for that amount.

Do not confuse what you net owe or get back with your total tax bill. What you paid in all year is irrelevant.

in other words, say you owed exactly $7500 in 2022 taxes. And you guessed right and withheld $7500 in taxes for the year. Then you’d owe no additional funds, or get any back, at year end.
And say you bought a Polestar in 2022. In this example, since you owed $7500, and you withheld $7500, and your net owing is $0, then because the tax credit wiped out the $7500 you owed, you would get a $7500 check back from Uncle Sam.

Since I'm also another one who is not super aware of how this tax credit works, I have another stupid question :

If you are married and filling taxes jointly, would you get the tax credit back accounted for both?
For example, if I owe 5k and my spouse owes 5k to Uncle Sam, then we would get total of $7500 credit back instead of just 5k (if I'm the purchaser of the car),

Right?

 

[PolkNole]

Since I'm also another one who is not super aware of how this tax credit works, I have another stupid question :

If you are married and filling taxes jointly, would you get the tax credit back accounted for both?
For example, if I owe 5k and my spouse owes 5k to Uncle Sam, then we would get totally of $7500 credit back instead of just 5k (if I'm the purchaser of the car),

Right?

Right.

 

[ejinaz]

Or do you get the full EV credit as long as you paid more than $7500 in income tax for that whole year, regardless of whether you owe or are getting a refund at the end of the year?

Can someone please explain it to me like I'm 5 years old?

If you made enough money to owe $7500 or more in federal tax then you qualify for the full $7500. If you had already paid in $5000 in taxes through withholdings or estimated tax payments and your tax bill owed is $2500....then the $7500 rebate would net you a refund in the amount of $5000 from the IRS. If filing jointly it would apply to both husband and spouse....if filing separately I think it can only be used towards the purchaser of the vehicle....so if you each only owe $3750 in federal taxes and file separately the maximum rebate would be the $3750 for whomever purchased the vehicle. Doesn't seem fair to me but that is how the law was written. I hope this helps and doesn't confuse you further

 

[Tacoenthusiast]

I only got back $2,200

Instead of owing $5300?

Or are you possibly retired and not earning much income currently

What you get back or owe has to be squared with what's been witheld so far in the year.

 

[krusshall]

You want the easiest explanation?

Look at Line 18 on your IRS Form 1040 (assuming you don't do 1040EZ).
If >$7500 then you'll take advantage of the full tax credit.
If <$7500 then you'll take advantage of partial tax credit up to that amount.

 

[HernameisElektra]

You want the easiest explanation?

Look at Line 18 on your IRS Form 1040 (assuming you don't do 1040EZ).
If >$7500 then you'll take advantage of the full tax credit.
If <$7500 then you'll take advantage of partial tax credit up to that amount.

I did mine through turbo tax

 

[krusshall]

I did mine through turbo tax

You should be able to parse their data and find your total tax owed for 2021.

 

[Evan D]

I'm sorry if I'm being dense here, but I have like the simplest taxes in the world, so I've never really cared to learn or understand how any of it works. I enter my W2 info and one 1099-DIV and I'm done. H&R block free file does the rest.

My withholding option is just the default one as a single dude. There has never been a year where I didn't get a federal refund when I did my taxes. So does that mean I will get no credit at all because my tax bill is always a refund?

I guess I just don't even understand what "tax liability" even means, hence the explain it to me like I'm 5 😂.

 

[Evan D]

You want the easiest explanation?

Look at Line 18 on your IRS Form 1040 (assuming you don't do 1040EZ).
If >$7500 then you'll take advantage of the full tax credit.
If <$7500 then you'll take advantage of partial tax credit up to that amount.

I'll take a look at that. Thank you.

 

[Evan D]

@krusshall Thanks for that tip. Looks like I will only be counting on about 3K of that credit then.

 

[SPuffman]

The EV tax credit is a non-refundable tax credit. The most straightforward definition:

A nonrefundable credit essentially means that the credit can't be used to increase your tax refund or to create a tax refund when you wouldn't have already had one. In other words, your savings cannot exceed the amount of tax you owe.

However, keep in mind that non-refundable tax credits are applied BEFORE withholding come tax time. Meaning that, let's say you anticipated owing 10k in taxes for the year and you have been optionally withholding more from your paycheck month to month to reduce that 10k tax-day payment, the 7500 will be applied first, and the extra tax money you withheld will be considered an overpayment and you will get a refund. That's what happened to us this year.

 

[julianm]

I'm sorry if I'm being dense here, but I have like the simplest taxes in the world, so I've never really cared to learn or understand how any of it works. I enter my W2 info and one 1099-DIV and I'm done. H&R block free file does the rest.

My withholding option is just the default one as a single dude. There has never been a year where I didn't get a federal refund when I did my taxes. So does that mean I will get no credit at all because my tax bill is always a refund?

I guess I just don't even understand what "tax liability" even means, hence the explain it to me like I'm 5 😂.

Based on your income you will owe the government a certain amount (“tax liability”).

Your employer is pre-paying your taxes on your behalf (“withholding”).

You are pre-paying more than you owe. So when you file taxes you get a “refund” because the government is giving you back money you already overpaid to them.

Therefore, just knowing your refund is not sufficient to understand how much tax you’re actually paying. The EV credit is valued against the amount you owe the government, not your refund.

 

[gray52452]

I'm sorry if I'm being dense here, but I have like the simplest taxes in the world, so I've never really cared to learn or understand how any of it works. I enter my W2 info and one 1099-DIV and I'm done. H&R block free file does the rest.

My withholding option is just the default one as a single dude. There has never been a year where I didn't get a federal refund when I did my taxes. So does that mean I will get no credit at all because my tax bill is always a refund?

I guess I just don't even understand what "tax liability" even means, hence the explain it to me like I'm 5 .

Because you earn income you owe money to Uncle Sam.

Your company takes money out of your paycheck every pay for Uncle Sam. If you are like many Americans you have your company take out more than you need to for your taxes.

Let’s say you earn 50K and don’t contribute to 401k or have medical insurance or anything else. And let’s say your tax rate is 12% meaning you owe Uncle Sam 12 cents for every dollar you earn. Your tax liability is 6000. Then you buy an EV. Your tax liability goes from 6000 to 0 because of the EV credit. You get a refund of 6K from Uncle Sam because your company sent the government 6K expecting that that was what you will owe. The government sends you back the 6K that your company sent them on your behalf.

Note that you don’t get 7.5K back because the EV credit is non-refundable. The government isn’t going to pay you just because you bought an EV.

This is why it’s stupid to say the price of an EV is X after the 7.5K credit. The price is the price. Any tax benefits you get for buying an EV are situational, as in the example I just made up.

 

[Tacoenthusiast]

Because you earn income you owe money to Uncle Sam.

Your company takes money out of your paycheck every pay for Uncle Sam. If you are like many Americans you have your company take out more than you need to for your taxes.

Let’s say you earn 50K and don’t contribute to 401k or have medical insurance or anything else. And let’s say your tax rate is 12% meaning you owe Uncle Sam 12 cents for every dollar you earn. Your tax liability is 6000. Then you buy an EV. Your tax liability goes from 6000 to 0 because of the EV credit. You get a refund of 6K from Uncle Sam because your company sent the government 6K expecting that that was what you will owe. The government sends you back the 6K that your company sent them on your behalf.

Note that you don’t get 7.5K back because the EV credit is non-refundable. The government isn’t going to pay you just because you bought an EV.

This is why it’s stupid to say the price of an EV is X after the 7.5K credit. The price is the price. Any tax benefits you get for buying an EV are situational, as in the example I just made up.

If you only make $50k it's probably not a great idea to buy a 50-60k car.....

I know it's just your random example, but it's not particularly hard to end up owing 7500

 

[Evan D]

If you only make $50k it's probably not a great idea to buy a 50-60k car.....

I know it's just your random example, but it's not particularly hard to end up owing 7500

He probably just used that number because that was the random number I threw out in the second post. Could you explain that last part though? If I've never owed money in my life previously, why would I owe $7500 if nothing has changed in my life other than purchasing a car?

Edit - Or did you just mean your tax liability is not hard to be $7500 because if you're buying this car, you are likely making enough money that your tax liability will be greater than that anyway?