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how does the 7500 tax credit work

Join Date Nov 2008 Location Milwaukee, WI Posts 18

How will the $7,500 tax credit work?

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?

Join Date Oct 2008 Posts 50

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.

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