Federal tax credit only provides credit against tax liability?

llinthicum1

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I have question about the $7,500 Federal Tax Credit that customers receive if they purchase a Mach-e. If the customer's Federal tax liability is less than the $7,500, do they still receive the full $7,500 or do they receive the tax credit equal to their tax liability. Just curious if the tax credit is $7,500 or up to $7,500. Also, I'm guessing that the tax credit is received when the customer files their taxes, not at the time of purchase.
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It's up to $7500, so if your liability isn't at least $7500, you won't get all of it. Yes, it would be received at tax time.
 
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llinthicum1

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It's up to $7500, so if your liability isn't at least $7500, you won't get all of it. Yes, it would be received at tax time.
Thanks. Potential buyers; e.g., retirees who don't have earned income, their tax liability is much lower than the $7500, so customers will have to factor that in.
 

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Thanks. Potential buyers; e.g., retirees who don't have earned income, their tax liability is much lower than the $7500, so customers will have to factor that in.
If a retiree has a 401K or IRA, it's a good time to take a distribution and have the tax owed paid by the credit!
 

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If a retiree has a 401K or IRA, it's a good time to take a distribution and have the tax owed paid by the credit!
Alternatively, one could do a traditional-to-roth conversion instead of a distribution, so that the money can continue to grow (and the growth will now be tax free). The strategy depends heavily on personal situations.
 


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llinthicum1

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If a retiree has a 401K or IRA, it's a good time to take a distribution and have the tax owed paid by the credit!
That is true.
 

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Alternatively, one could do a traditional-to-roth conversion instead of a distribution, so that the money can continue to grow (and the growth will now be tax free). The strategy depends heavily on personal situations.
That's actually my plan!
 

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Question for all you people smarter than me in taxes: I have $15k sitting in an IRA that was essentially free money from a company contribution I worked at many moons ago. It’s separate from my 401k that I build and I typically just use it to play with a few stocks every now and again.

So my question is, if I withdrew that to make a big down payment on my car, I would get hit with near half off for taxes, BUT the 7500 tax credit could essentially wipe that out, right? It would basically be like being able to put 15k down on the car, right?
 

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Question for all you people smarter than me in taxes: I have $15k sitting in an IRA that was essentially free money from a company contribution I worked at many moons ago. It’s separate from my 401k that I build and I typically just use it to play with a few stocks every now and again.

So my question is, if I withdrew that to make a big down payment on my car, I would get hit with near half off for taxes, BUT the 7500 tax credit could essentially wipe that out, right? It would basically be like being able to put 15k down on the car, right?
Even with the early withdrawal penalty, I doubt you'll get hit with 50% tax on that, it would just follow your marginal tax rate at that point since the income is incremental. If you don't have 7500 of tax liability it won't be that high- if you just need to get your liability to the point where you can take advantage of the full tax credit, then look into converting that traditional IRA to a Roth IRA. You will pay income tax all the same but no withdrawal penalty.
 

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It's up to $7500, so if your liability isn't at least $7500, you won't get all of it. Yes, it would be received at tax time.
Don’t quote me on this, but I believe you could recoup this sooner than tax return time by changing your withholding during the course of this tax year.
 

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I have question about the $7,500 Federal Tax Credit that customers receive if they purchase a Mach-e. If the customer's Federal tax liability is less than the $7,500, do they still receive the full $7,500 or do they receive the tax credit equal to their tax liability. Just curious if the tax credit is $7,500 or up to $7,500. Also, I'm guessing that the tax credit is received when the customer files their taxes, not at the time of purchase.
Two things related to this and other comments that followed:
1. Not sure what you mean by "tax liability." Some people seem to think that means taxes owed at the time you file your taxes above and beyond any withholding and other tax payments. Just to be clear, to get the full $7500, your federal taxes for the year need to be $7500 or more. It does not matter how much you have withheld or how much is due at the time you file. The only thing that matters is whether your total federal income taxes for the year in which you make the purchase is $7500 or more.
2. Someone commented that you need to have enough "earned income" to have $7500 in federal taxes. In fact, any source of income that creates a federal tax qualifies. You could have zero earned income but income from investments, IRA distributions, etc. All that matters is if your income causes your federal income tax to be $7500 or more. If less than $7500, the tax credit will eliminate your entire taxes but no more.
 

dbsb3233

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Question for all you people smarter than me in taxes: I have $15k sitting in an IRA that was essentially free money from a company contribution I worked at many moons ago. It’s separate from my 401k that I build and I typically just use it to play with a few stocks every now and again.

So my question is, if I withdrew that to make a big down payment on my car, I would get hit with near half off for taxes, BUT the 7500 tax credit could essentially wipe that out, right? It would basically be like being able to put 15k down on the car, right?
Yes. Let's assume you're in the 25% tax bracket, meaning the next $1000 of income you add means an additional $250 added to your federal income tax liability. If you withdraw $15k from an IRA, that would generate an additional $3750 to your federal income tax liability. So depending what your federal income tax liability would already be, you can back-calculate how much is best to withdrawal to push your tax liability over $7500.

But also keep in mind that if you're under age 59.5, you'll also incur a 10% penalty on whatever amount you prematurely withdraw from an IRA. And you may not be in the 25% tax bracket (or cross over part-way), so adjust accordingly.
 

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Yes. Let's assume you're in the 25% tax bracket, meaning the NEXT $1000 of income you add means an additional $250 added to your federal income tax liability. If you withdraw $15k from an IRA, that would generate an additional $3750 to your federal income tax liability. So depending what your federal income tax liability would already be, you can back-calculate how much is best to withdrawal to push your tax liability over $7500.

But also keep in mind that if you're under age 59.5, you'll also incur a 10% penalty on whatever amount you prematurely withdraw from an IRA. And you may not be in the 25% tax bracket (or cross over part-way), so adjust accordingly.
Thank you for this. This clears up a bit for me. I know about the 10%, I’m 46 years old so that would definitely apply and it looks like with my and my wife’s income, we’re in 24%. When we do our taxes this year I’ll have to note our current liability to then plan for next year. Ultimately I’m trying to use that “free money” to make a hefty down payment so I can reduce my monthly payment on the vehicle overall.
 

dbsb3233

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Thank you for this. This clears up a bit for me. I know about the 10%, I’m 46 years old so that would definitely apply and it looks like with my and my wife’s income, we’re in 24%. When we do our taxes this year I’ll have to note our current liability to then plan for next year. Ultimately I’m trying to use that “free money” to make a hefty down payment so I can reduce my monthly payment on the vehicle overall.
Thanks for catching my error there -- it's the 24% tax bracket, not 25%. Used to be 25% but I keep forgetting that changed to 24%.

Sounds like you have a handle on it. It's always a shame to burn 10% on penalty, and usually that should be avoided. But if you're in a position that those are really your only to options (losing some of the $7500 tax credit vs paying 10% in penalty), then it's worth paying the penalty since 24% savings is > 10% penalty.

But there may be other options that are even better, such as the rollover to a Roth as suggested above. Depends a lot on your cashflow situation though. If not having that $15k down payment means financing $15k more, you're paying interest on that over years, which could add up to close to (or more) than the 10% penalty (depending on your loan interest rate). Similarly, it also depends on how much income you expect to make off of leaving that $15k in an investment account.

Lots of "what ifs". But sometimes simplicity is worth the trade-off, and offers more peace-of-mind. It's pretty simple to withdraw just enough from the IRA to make sure you can use the full $7500 tax credit. I probably wouldn't withdrawal any more though, unless you're getting a really crappy loan interest rate that makes that worth paying 10% penalty too.

Also remember an IRA wthdrawal boosts your state income taxes too, if you're in a state that has them. So factor that in too.
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