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Is The $7500 Federal Tax Rebate Considered "Income"?

Is The $7500 Federal Tax Rebate Considered "Income"?

I purchased a new/refresh MS60D and took delivery in September 2016. Filed our Federal income taxes in early February 2017 and just received our $7500 tax rebate in the mail. Since my wife and I both receive W2s we work our W4 form withholdings so that at the end of the tax year we don't owe the feds or the state anything, since I used to hate getting a tax refund only to have it be considered income for the same year I received it. So, for those of you who received the $7500 federal rebate in years past, is the Federal rebate taxable as income?

Teetoogrn | February 26, 2017

No, because it's not a rebate. You receive no funds. You're allowed to reduce your taxable income by the credit. That is if you qualify. Some, with high alternative minimum tax, may not.

Bighorn | February 26, 2017

No

patrick40363 | February 26, 2017

NO

DTsea | February 26, 2017

Jth3000 it is a tax credit not a deduction. It reduces your tax liability not taxable income.

Teetoogrn | February 26, 2017

DT, you're correct. I meant to say your tax liability. Thanks.

mntlvr23 | February 26, 2017

Regarding the taxes on your "refund", that is justified. ie: you over-withheld for your state taxes in Year A and therefore paid no federal taxes on that money (that you had yet to receive and had deducted from your gross income).

Then in Year B, you get your state refund from Year A. It is now realized income that had never been taxed by the Feds. Even though it was initially earned in Year A, it was received in Year B, and will be treated as taxable income in Year B.

Completely different than a tax credit - as pointed out by others.

reed_lewis | February 27, 2017

Actually the 7500 vehicle tax credit is not reduced by AMT at all. The only thing that reduces it is other credits such as foreign tax credit, education credits, and child care credits.

Check out the 1040 form and see that form 8936's numbers are entered in line 54 after AMT is already determined.

Rocky_H | February 27, 2017

@mntlvr23, That is wrong. That is not how tax refunds work.

The analogy is this: In a year, you make $10. When passed through the tax calculations, you are supposed to keep $8 and owe $2 in taxes. You accidentally had $3 withheld during the year, so you get $1 change from the amount you accidentally overpaid. That is the refund, and that year should be done with.

Your statement: " It is now realized income that had never been taxed by the Feds. " is B.S. It has already been accounted for through the tax calculation for the year. You did not earn $10 + $1 the next year by carrying over that $1 as "new income" into the next year. That would clearly be double taxation, counting that $1 as part of the income accounting in the first year, and the following year.

Federal taxes are smart enough (honest enough) to not do that. They do not count a refund as income in the following year. Some states, however, do not do this the right way. We live in Idaho, and it irritates my wife a lot every year that Idaho counts refunds as new income in the following year, which is double taxation. Unfortunately, we can't quite get our W4's adjusted to get the federal and state levels to work out right. With federal about even, we get a state refund (which we really don't want for this reason). But if we shift W4's to not have the state refund, we owe a high enough amount on federal, that it categorizes as a penalty for not withholding enough.

drklain | February 27, 2017

Rocke -- I think what confused him is how the federal income tax treats state tax refunds. Since the 1040 provides a credit for state taxes paid, people who get a large state tax refund over-deduct on their 1040. Having do so, they have two choices. (1) they can refile the income tax or (2) (and most common) the refund is reported on the following year's federal tax return and is treated as additional income.

That said, I agree with all your comments about how the tax credit works.

stevenmaifert | February 27, 2017

Although mntlvr23 comments don't relate to the OPs question, he is correct regarding the Federal taxation of state refunds. This applies only to those who itemize their deductions on their Federal tax return. Schedule A, Line 5 is where you report current year state income tax withholding. That amount is added to your other Schedule A itemized deductions and reported on Form 1040, Line 40. The amount on Line 40 is then subtracted from your Line 38 Adjusted Gross Income. Because your current year State withholding is part of your current year itemized deductions, you won't pay Federal income tax on that amount. Now, if when you complete your current year State income tax return your State tax liability is less than the amount of state income tax withheld, that excess withholding is refunded to you. Remember, because that current year State withholding was an itemized deduction, you haven't paid Fed. income tax on any of it. The amount of your State income tax refund now becomes part of your next year income and is reported on Form 1040 Line 10. The state should also send you a Form 1099 which reports your taxable refund to the Fed.

Rocky_H | February 27, 2017

@mntlvr23, Oh goodness. I'm sorry for my harsh answer. I was wrong because I missed that distinction you made about state versus federal, and I didn't realize how state tax withholding is not processed through federal tax percentages. I'll have to check into that, but that would make sense.

Haggy | February 27, 2017

It's not income because nobody is giving you money. You got a refund because you overpaid your taxes. Tax refunds aren't income either. A state tax refund is different because if you wrote off the state tax you paid, and then got some of it back, you wrote off more than you actually paid. With federal taxes, if you had merely adjusted your withholding allowances so you had $7500 less taken out over the course of the year, you would have gotten nothing back, but you'd have an extra $7500 that never got deducted. It's the same thing. You gave the government too much money. They gave you back money that was yours in the first place.

Jeff Hudson | February 27, 2017

+1 Haggy - Your answer is 100% crystal clear. The OP's question suggests he does not understand the basics of the federal Plug-In Electric Drive Vehicle Credit. Furthermore, there is absolutely zero truth to his statement " just received our $7500 tax rebate in the mail."

robgorman | February 27, 2017

Sorry for the use of the term "rebate". I realize what I got was a credit, but to me it was money back in my pocket, and I wanted to know if it was taxable in 2017. Thanks for the info. This forum rocks.

mntlvr23 | February 27, 2017

@stevenmaifert -

I think that my comment did relate to one segment of the OP. In the OP, rob stated "hate getting a tax refund only to have it be considered income for the same year I received it". I outlined how that might happen.

I agree with the comments previous to mine regarding credit versus statement, and with Haggy's concise explanation of the fundamental issue - but wanted to add the other tid-bit to explain that last part. I am sure that I mis-stated something in my explanation, but hopefully the intent went through.

mntlvr23 | February 27, 2017

credit versus rebate (damn voice recognition)

jipark1 | March 28, 2017

I'm just preparing for Federal Income Tax and my CPA tells me I cannot get all $7,500 tax credit, but only $2,500 because I bought it for my personal use and not for business. I am a retiree and I don't have a business. I am a little upset because nobody has told me this was the case. Did you know all this? Where does it say this in written form?

McLary | March 28, 2017

jipark1

It is most likely that you do not have enough taxable income to take advantage of the credit. It is not refundable. It can only reduce federal taxes otherwise payable. The $2500 could be the portion you can use, or the California credit. There is no requirement that the car must be for business use. I would find a more knowledgeable accountant.

vp09 | March 28, 2017

jipark1 I think your CPA is wrong. I'm taking two $7,500 credits, and I don't have a business.

reed_lewis | March 29, 2017

What the OP was probably saying is that they got their federal refund check in the mail.

The EV car tax credit is just that a tax credit. It lowers the amount of money you owe the government on your taxes.

If you happen to 'break even' and have exactly the right amount taken out of your paycheck, then you will receive a tax refund of $7500.

If you have too little taken out, then you will get a tax refund of less than $7500.

If you do not owe much in taxes, you will get less off your taxes.

As to business versus personal use. You can get the complete $7500 as long as you have enough tax you have to pay the government. The form is 8936. You use part 1 and 3 for personal use.

Now there are a few things that lower the credit available.

Rocky_H | March 29, 2017

@jipark1, Your accountant is wrong. Personal use is just fine, and you can get the full $7,500; that's what most people here did. The IRS forms are clear that this is OK.

As others have mentioned, it is an entirely separate issue about whether you have enough taxable income. If most of your income is from social security, that is not taxable, and you might not have $7,500 in taxes owed for the year. If you owe $5,000 in taxes for the year, then $5,000 is all you could get from the tax credit.

stevenmaifert | March 29, 2017

@jipark1 - Your CPA is making the same mistake other tax professionals are making because they simply aren't reading the Form 8936 and instructions properly. Here is the form: https://www.irs.gov/pub/irs-pdf/f8936.pdf Line 4 "If the vehicle has at least four wheels, enter the tentative credit (see instructions)" Here are the instructions for Tesla cars: https://www.irs.gov/businesses/30d-new-qualified-plug-in-electric-drive-... Part II of the form is used to calculate the Credit for Business/Investment Use Part of Vehicle. You said you don't have a business so you skip Part II and drop to Line 15. You enter the amount from Line 4, which per the instructions for Tesla cars, is $7500. Now here is the part that seems to be tricky for the CPAs. Tell your CPA to read Line 15 carefully "If the vehicle has at least four wheels, leave lines 16 and 17 blank and go to line 18. Again, disregard lines 16 and 17. Line 18 "For vehicles with four or more wheels, enter the amount from line 15" which should be $7500. The rest of the form is straight forward arithmetic which will determine if you have enough tax liability to use all the $7500 EV tax credit.