Walk me through the PHEV federal tax credit (US)
March 11, 2020 9:24 AM Subscribe
Car shopping right now, and strongly considering PHEVs (and BEVs) for my next vehicle. I had been focusing on used vehicles due to pricing and budget, but multiple people have recommended I buy new and take the tax credits both at the state and federal level. You're not my accountant, but I need an explainer on how this works.
So, Colorado offers a $4k tax credit that can be taken at time of purchase by the dealer. For the cars I'm looking at, the US government offers a $7500 tax credit that can not be taken by the dealer. Here is my understanding of how this would (or not) work for me, with the goal of making my monthly payment – I will need to finance – as low as possible.
1. Purchase a car at full price, less the $4k Colorado credit.
2. Finance the full price of the car.
3. Adjust my W-4 withholdings so I could realize the tax credit prior to April of 2021.
4. Apply the increase in income to the car payment to make it palatable.
5. Once April rolls around, apply the refund to the car loan.
6. Refi the car loan for the new, should be much lower amount.
Is my general understanding correct?
My concern is that I'm not in a position to take on the higher payments, so financially this really doesn't feel like a viable option – but I want someone else (preferably someone who has done this) to check me on this.
So, Colorado offers a $4k tax credit that can be taken at time of purchase by the dealer. For the cars I'm looking at, the US government offers a $7500 tax credit that can not be taken by the dealer. Here is my understanding of how this would (or not) work for me, with the goal of making my monthly payment – I will need to finance – as low as possible.
1. Purchase a car at full price, less the $4k Colorado credit.
2. Finance the full price of the car.
3. Adjust my W-4 withholdings so I could realize the tax credit prior to April of 2021.
4. Apply the increase in income to the car payment to make it palatable.
5. Once April rolls around, apply the refund to the car loan.
6. Refi the car loan for the new, should be much lower amount.
Is my general understanding correct?
My concern is that I'm not in a position to take on the higher payments, so financially this really doesn't feel like a viable option – but I want someone else (preferably someone who has done this) to check me on this.
Best answer: 3. and 5. are not compatible -- if you've changed your withholdings to account for the credit, you won't also get a big refund.
Also, the increased income only lasts for that year, while the payment keeps coming.
posted by Dashy at 12:00 PM on March 11, 2020 [1 favorite]
Also, the increased income only lasts for that year, while the payment keeps coming.
posted by Dashy at 12:00 PM on March 11, 2020 [1 favorite]
Response by poster: That is pretty much what I suspected. Thank you!
posted by hijinx at 5:25 AM on March 12, 2020
posted by hijinx at 5:25 AM on March 12, 2020
The federal tax credit reduces your tax liability. You don't have to change your withholding; you'll see a tax reduction or refund if your total tax liability (i.e. what you've paid+owe to the IRS) is equal or greater than the EV tax credit. Whether that means a refund or not depends on how much has been withheld already.
If someone was in a situation where they don't owe the IRS taxes for some reason (by having very little income or big deductions or whatever), they wouldn't see any benefit to the EV tax credit because they don't have any tax liability.
Just make sure that the vehicles you're looking at actually qualify for the federal tax credit. According to the link below, several PHEVs don't qualify for $7500.
https://www.fueleconomy.gov/feg/taxevb.shtml
posted by Quiscale at 11:39 AM on March 12, 2020
If someone was in a situation where they don't owe the IRS taxes for some reason (by having very little income or big deductions or whatever), they wouldn't see any benefit to the EV tax credit because they don't have any tax liability.
Just make sure that the vehicles you're looking at actually qualify for the federal tax credit. According to the link below, several PHEVs don't qualify for $7500.
https://www.fueleconomy.gov/feg/taxevb.shtml
posted by Quiscale at 11:39 AM on March 12, 2020
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Drive Electric No(rth) Co(lorado) has a page on federal and state tax credits, which states that the CO tax credit is $5k. The page also including a link to Fuel Economy.gov's page on eligible vehicles and tax credits.
posted by filthy light thief at 9:51 AM on March 11, 2020