Please explain tax credits to me (US)
I feel like I have a basic understanding of tax credits, but nothing so far as would make the most sense in what I want to know: I'm looking into buying a new car, and it looks like I can get a 7500 tax credit for the car I'm interested in buying. My understanding is that these credits are "non-refundable" meaning I don't actually get that money back, but how does it still work? I pay into the income tax (I know, I don't want to know the benefits of doing this vs not, it's just easier for me to pay more and get some back when the time comes), so I always get a refund. Would my refund be higher then because I get a credit on the taxes that I paid in? Or would it be the same and my tax liability would be reduced?
I need someone to explain this to me like I'm 5, please!
Non-refundable just means that the tax credits can't make your tax burden negative. That is, if you only owed $7000 in taxes, and you received $7500 in tax credits, you would pay $0 in taxes that year, netting you $7000 in effective value (as opposed to the full $7500 in value).
Realistically, you'd have to be like barely above the poverty line to not owe more than $7500 in taxes, and you'd probably not be looking at buying a new (and probably electric, given the tax credits) vehicle anyway.
Whether or not you get a refund is based off of whether more money was withheld from you (as your income tax is automatically deducated from your paychecks) than you actually owe in taxes. Assuming your total tax burden is >$7500 (which it almost certainly is), then you would expect $7500 more in your tax refund.
So to put it in simple math terms:
say I owe 10K, but I pay in extra and pay in 12K, normally I would get that 2K back, but if I get the 7500 tax credit, I would get 9500 back?
I just want to make sure I understand exactly how this works since we don't want to be out this much money on a car, and want to spend that tax credit directly on paying down the car loan.
Correct.
Worth noting that in 2024 you won't have to do this song and dance at tax time as the tax credit will be available directly at the dealership to reduce the cost of the car/loan amount: https://www.wsj.com/personal-finance/irs-revs-up-tax-credit-for-buying-evs-59b845d
I did see that! The problem is that my current car is under the Hyundai recall and we don't want to have to deal with it any longer, even though I love it.
Thanks for letting me knoW This makes so much sense. <3
Yes, because now you actually owe $2,500 in taxes but had $12,000 dollars withdrawn, so your tax refund is $9,500.
Thanks! This makes so much more sense. I appreciate this and it was the deciding factor with my husband to go test drive cars tonight!
Electric car, eh? Good for you! They're great.
On to your question: If your tax liability is $7500 and you received a nonrefundable tax credit of $7500, your tax liability would be $0.
If your tax liability was $3000 and you received a nonrefundable tax credit of $7500, your tax liability would be $0. You don't receive the extra as a refund.
Hope that helps!
Thank you! We were looking at plug in hybrids at first, but given how little driving I do, it makes more sense to get me an electric car instead.