The mystery of the tax credit

October 20, 2006 8:53 AM

How do tax credits work? My husband and I both bought Priuses early this year (well before the 60,000 mark), and we get tax credits of $3,150 for each car. Which is awesome, but...

My car was a planned purchase, and it was timed to get this year's tax credit to offset an expected financial transaction that was supposed to come with some hefty taxes. Except, it actually doesn't - I've paid taxes for years on that stuff already, and there's no hit at the end. So there's nothing there to offset with the credit after all.

Also, we rent our house and so do not traditionally itemize our taxes, and generally come in just about even on our taxes every year. I had meant for both of us to calculate the dollar amount by which we should reduce our withholding on our paychecks to come even with the credits, and then we went though some pay changes, so I waited, and by the time the dust settled I forgot to do it and now we've got two months, which isn't a whole lot of taxes to not pay.

My research about tax credits has taught me a lot about UK and Canadian taxes, and not so much about the US. I am assuming that the government is not going to pay us all this money if we don't have something to apply the credit to, but I really can't tell that for sure.

We didn't buy the cars to make money, but if I can make some use out of the tax credits, that would certainly be the smarter thing to do. Can anyone tell me something non-speculative (unlike all the news articles about the hybrid tax credits) about how tax credits are supposed to work, or find me resources worded for the layperson that might help me get my ducks in a row before I start looking for a tax preparer? I don't even know if anyone knows - at the beginning of the year, there was a definite "oh, somebody'll figure it out by April '07, I'm sure" vibe surrounding the whole thing.

I will assume on all answers that YANACPA.

posted by Lyn Never to work & money (9 comments total)

It all depends on whether or not the "Prius Credit" (obviously not the official name) is a refundable credit.

If it is, you get a check.

If you can find out what the official name of the credit is, you can start googling to find out if it's refundable.
posted by Wild_Eep at 9:01 AM on October 20, 2006

I don't know if this is helpful, but here's the IRS page on hybrid credits.

This is the form you'll need to get the credit.

From what I understand, you won't get a check in the mail. But if you owed the IRS money, the amount you owed would be less the credit amount.
posted by misanthropicsarah at 9:01 AM on October 20, 2006

Your tax return will say you need to pay $X amount of taxes. You subtract $6300 from that. If that amount is less than you paid in withholding, you get a tax refund check from the IRS.
posted by smackfu at 9:03 AM on October 20, 2006

Be careful! Depending on your financial situation, $6300 in credits may mean that you get hit with the Alternative Minimum Tax, which has an entirely different set of rules. You should probably consult with a tax adviser to make sure you don't end up paying more tax by taking both credits.
posted by zachlipton at 9:17 AM on October 20, 2006

smackfu has it -- it really doesn't matter how much you withheld, or whether you had other tax hits. As long as you owed the government more than $6,300 in 2006, you'll get the full benefit of the credit. That could take the form of a higher refund, or just reduce the amount you owe.
posted by pardonyou? at 9:38 AM on October 20, 2006

The hybrid tax credit is non-refundable, meaning that it will reduce your tax liability, but not below zero. However, if your tax liability is reduced to zero, any income tax withheld from your pay will still be fully refundable to you, up to $6,300.

For example, if together you earned $40,000, and had $4,000 withheld for income tax, the $6,300 credit would only get your $4,000 refunded. If you together earned $80,000 and had $10,000 withheld, you'd receive the full $6,300 in the form of a refund, plus or minus whatever your settlement would otherwise be.

If I were you I wouldn't worry about adjusting withholding at this point. Just look forward to that nice refund check next year.
posted by Snerd at 9:45 AM on October 20, 2006

Thank you, everyone! I have always had this stupid mental divide between the taxes I owe and the taxes I've already paid, as if paying them ahead of time is somehow different. Now that I understand the layout, I'm not so worried about getting it filed right.
posted by Lyn Never at 10:14 AM on October 20, 2006

Do also check if your STATE has a similar hybrid tax credit, which would apply in a similar way to your state taxes. Several states do.

Since the government will be owing you money, do your taxes as soon as you can: generally around the first week of February, you'll have all the necessary information. By filing that early, you will get your refund quickly.
posted by jellicle at 10:20 AM on October 20, 2006

For completeness' sake, here's Toyota's page on the hybrid tax credit.
posted by Joleta at 1:53 PM on October 20, 2006