EV tax credit explained
I posted this as a comment on another thread and it received positive feedback so I thought it
might be more helpful as it’s own post in case anyone is searching for information on the EV tax
credit:
To simplify this let’s say you make $109,226 in 2023 and you don’t have enough itemized
deductions to exceed the standard deduction of $13,850, so you are going to use the standard
deduction of $13,850. So you are going to be taxed on $95,376.
For $95,376 in earnings you owe $16,290 in taxes.
If you pay the tax throughout the year via payroll withholding, estimated tax payments, etc. that
doesn’t change the fact that your tax liability (what you OWE in taxes) is $16,290.
Now, let’s say your employer withholds $20,000 from your paychecks for federal tax. At the end
of the year you have overpaid $3710 and get that back as a refund (because you only owed
$16,290 but you paid $20,000).
With the EV tax credit the $7500 is applied as a credit towards what you owe, so in this instance
you originally owed $16,290, but then the EV credit got applied and reduced what you owed by
$7500, making your tax owed $8790 instead of $16,290.
Now, you still paid $20,000 throughout the year towards what you owed, so now you’ve paid
$20,000 towards $8790 and will receive a refund of $11,210 ($7500 more than your original
refund, the full value of the EV tax credit).
The language describing the EV tax credit as “non-refundable” simply means that you will not
get back more money than you are supposed to have paid in taxes throughout the year. For
instance, if you made $58,576 and used the standard deduction your total tax liability for the
year is only $5147. You can apply the EV tax credit to that amount and get up to an additional
$5147 back, but the remaining $2353 from the $7500 is not available to you as a refund as you
never owed that extra $2353 to the government in the first place. You can only apply the
$7500 towards the amount of taxes you owed in total for the entire year.