r/Clarity • u/rocketshiptech • Sep 19 '20
Everything you ever wanted to know about the $7,500 EV Federal tax credit
Having recently bought a Clarity, I thought I would do a write-up on the $7,500 Federal tax credit as there seems to be a lot of confusion on how it works. When I actually did the math, I was surprised by how much income you actually had to make to fully benefit from the $7,500. Hopefully this helps others with their decision-making.
Some background:
Federal tax is not State tax, nor is it payroll / FICA tax. You might feel like you pay more than $7,500 per year in taxes, but a big portion of that might be payroll or State taxes that are not affected by the EV tax credit.
The EV tax credit is non-refundable, meaning if you owe less than $7,500 in Federal taxes across the year, you don’t get any excess refunded to you. So if you only owe $6,500 across the year, your tax credit is only $6,500 - you would then owe $0 in Federal taxes.
Your “Total Tax” owed, from which the $7,500 is deducted, has nothing to do with how much you’ve had withheld from your paycheck for taxes over the year.
The easiest way to figure out what your total Federal taxes are is to look at your tax return for last year: Form 1040 line 16 (Total Tax). If this number for last year is at or above $7,500, and your income for this year will be at least as much as last year, then you can probably expect to make use of the entire tax credit.
Now let’s get into specifics - how much income do you have to make to incur $7,500 in total Federal taxes over the year?
(All numbers below are for the 2019 tax year, 2020 figures will be slightly higher)
Let’s start with the tax tables:
https://www.irs.gov/pub/irs-pdf/i1040tt.pdf
If you are single, we find that $7,500 tax is incurred at $52,900 taxable income.
If you are married (filing jointly), we find that $7,500 tax is incurred at $65,700 taxable income.
But taxable income is not gross income. For that we need to add back deductions. For a single person the standard deduction is $12,200 and for married filing jointly it is $24,400.
So now we are at $65,100 for a single person and $90,100 for a married couple.
But wait, we’re still not done! Many people have income that is sheltered from taxes and never even hits the tax return. This includes things like pre-tax 401k contributions, HSA / FSA / transit contributions, and medical insurance premiums.
Let’s say a single person contributes the $19,500 maximum to her pre-tax 401k, and also pays $2,400 in medical insurance premiums. This means her gross income is now $87,000 before she incurs $7,500 in Federal income tax.
Now let’s look at an extreme example. For a married two income couple maxing out two 401ks at $39k, $5k in medical premiums, $5k in dependent care FSA, $7k in HSA, $3k in commuter parking account, $3k in commuter public transit account, $2k in limited purpose FSA, the maximum mortgage interest and state and local tax deductions ($8k above the standard deduction), and two children who qualify for the child tax credit ($24k in additional income allowed to receive the credit), they will need a gross income of $190k before they incur $7,500 in Federal income tax to be reduced by the EV credit.
This was certainly surprising to me. Maybe to you as well.
