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How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 10:29 am
by SilverLeaf
When purchasing the vehicle, how exactly does the tax credit work? Do we have to pay the $32-33k to the dealer and then file to get the $7,500 back in taxes? Or is there some type of program worked out with Nissan (or the dealers) for this.

If I purchase the vehicle, I don't want the entire $7,500 in the entire contract term. Any info would be greatly appreciated.

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 11:09 am
by sjfotos
I have not read the applicable law, but happen to be meeting with my accountant on Thursday, so i will bring back his opinion after that meeting.

In the interim:

A tax credit generally means that you receive a deduction off your taxes (federal in this case, unless you also have a state program). In other words, you do not receive the cash up front. What you get is a reduction in the taxes that you owe for that year. You either get that in a refund or in a reduced payment, depending upon how much in taxes you owe. In the worst case, you would buy something on January 1st of one year and not be able to get the credit until the subsequent year's filing.

Note that if you owe less than $7,500 in federal taxes, you don't gain anything from a tax credit because you did not owe the government anything in the first place. This is different than a tax rebate or a grant, in which you typically receive a check at, or shortly after, purchase.

Tax credits are paid to the owner of the purchased asset. For this reason a Nissan dealer cannot give you the $7,500. If you buy the asset, you are the one who must clam it. This is different than the lease option. In this case the Nissan Credit company owns your car and can give you the value for the tax credit in the reduced leasing payments because as the owner of the purchased asset, they can claim the $7,500 credit. Since they would usually have a pretty substantial tax payment, they benefit.

In short, if you buy the car, you are likely to have to finance it at the actual pre-tax credit price. You can then claim the tax credit, get a refund (hopefully), and pay that refund into the car loan OR re-finance the loan at that time.

Note: I will try to confirm this on Thursday.

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 11:26 am
by JasonT
Assuming the tax credit for cars works the same as the tax credits for home solar installations (I see no reason why they would not be similar/identical) then what SJFotos said is how it will go down. I've gotten Federal and State tax credits for my home solar installation and upgrade and that's how it worked.

For those purchasing the car you should really just pretend the credit doesn't exist since you won't see it until after you file your taxes.

On the good side, this is a tax credit, not a tax deduction. Credits are much better in that they directly lower how much you have to pay in taxes. Deductions just lower the amount of your income that will be taxed. As an example: a $1,000 credit drops the taxes you owe by $1,000, while a $1,000 deduction means you might pay $100-$300 less in taxes (completely rough numbers, I am in no way an accountant).

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 11:30 am
by sjfotos
Thank you JasonT, you made a very good point about the CREDIT versus the DEDUCTION. I muddied up the water with using 'deduction' in a non technical sense for the tax code. Good catch!
Steve

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 11:34 am
by mwalsh
JasonT wrote:For those purchasing the car you should really just pretend the credit doesn't exist since you won't see it until after you file your taxes.


Not necessarily. You could (my opinion only...please consult your tax adviser) adjust your withholding to account for the credit.

For example...during a normal year, my tax liability is right around $7500 (as it happens). I reckon I could go tax exempt during the entire year I plan on buying the Leaf. That's one of the reasons I'm hoping for December delivery this year...I'm already filing tax exempt, and can until July, at which time I generally have to start having my normal withholding amounts taken again. UNLESS, that is, I know I've got a Leaf to pay for by December!

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 11:39 am
by Jimmydreams
mwalsh wrote: Not necessarily. You could (my opinion only...please consult your tax adviser) adjust your withholding to account for the credit.



That's sort of what I did for my solar install last year.

I was getting a tax credit of $18,500 this year. (yikes!) I knew it was coming, so for almost the entire 4th quarter of last year, I was claiming single and 99 exemptions. They withheld almost zero federal taxes for three months. That gave me a lot of the $18K 'early' in my pocket. Kinda nice to end the year with bigger paychecks. ;) (although it made my federal refund that much smaller.)

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 12:56 pm
by redLEAF
It will more than likely be handled similarly to '09's tax law for sales tax on a new car purchase deduction (was allowed if you itemized or not, just had an income and purchase price limit), see IRS info below. You paid the tax and realized the tax deduction:

http://www.irs.gov/newsroom/article/0,,id=205863,00.html

In the state of IL, a car lease requires sales tax be paid for the entire value of the car, not just the lease payments so this 'special' deduction was 100%, not sure on how it affected leases in other states where you only pay sales tax on lease payments. I took this deduction last year as well as a cash for clunker deal on a new car purchase.

I also found this on the older hybrid tax credit, this one spells out what happens with leased cars:

http://www.irs.gov/newsroom/article/0,,id=107766,00.html

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 1:39 pm
by Rat
I think some people may still be confused. In general a tax credit is like cash owed you at the time of tax filing. The IRS will reduce your taxes by that amount if you owe any taxes and increase your rebate if you are owed one by that amount. You do not have to itemized deductions, as it is not a deduction, but a credit. Most tax credits are still owed to you even if you owe no taxes for the entire year, but it depends on how the law is written and I have not researched this for this one. Unlike a deduction, a credit is worth the same amount to everyone. A $1000 deduction for someone in the 30% marginal tax bracket reduces taxes by $300, but to someone in the 15% bracket only by $150. A credit reduces them by $1000 for everyone. Also, bear in mind the Alternative Minimum Tax (AMT) rules often take back the benefits of deductions or credits for taxpayers in higher brackets, and in any event make the benefits on either uncertain until you actually do your taxes.

A note of warning on reducing your withholding or estimated tax payments. If you know for sure you will owe much less in taxes due to the credit or any other reason, you can get your money early by reducing your withholding (or estimated tax payment) and thus get a larger net paycheck. But if you misjudge, the penalties for underwithholding are quite severe, so you don't want to go too far down that road. Also, it is easy to forget to increase your withholding for the next year back to normal or you could end up underwithholding that year and get hit with big penalties.

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 1:48 pm
by garygid
If your total Federal taxes are less than the $7500 (for example $5000), I believe you do not get a $2500 refund, and cannot carry the unused $2500 credit over to the next year.
But, I could be wrong.

Re: How Exactly Will The Tax Credit Work

Posted: Tue May 04, 2010 2:37 pm
by sjfotos
garygid, I believe you are correct. I will be checking on Thursday to post here.
Steve