Confusion on Tax Credit

decrease your tax withholding for 2006 so you owe the goverment more taxes therefore will get all of the tax credit back.
ie if w4 is married one exception make it married three exceptions
or single 0 exceptions make it single 2 exceptions

 

This is a non-refundable credit. It can only be as large as your tax liability. How much you have in withholding makes no difference in what your credit is but it does make a difference in how much your refund is which is true for every tax return.

For example, your tax liability is $2,000, withholding $2500 and credit $3000. Your refund would be the amount of your withholding. The credit would pay the entire $2000 of tax liability. The extra $1000 of credit couldn't be claimed or refunded or carried forward.

Another example, your tax liability is $5,000, your withholding $3500, and credit $3000. Now instead of owning the IRS $1500 which would be the case if you had no credit, you receive a refund of $1500 ($5000-$3000 = $2000 tax liability after credits; then $3500 - $2000 = $1500 refund.

Earned income credit and additional child tax credit are the only refundable credits (you can get back more than you had in withholding if you qualify for these credits).

Hopefully this helps. I've been doing taxes for over 10 years now, so ask questions if my answer is confusing.

 

Sorry, that is exactly right.
If your total tax burde for 2005 is $2200, your AMT will be $0.
The tax credit will not reduce your taxes below your AMT, in this case $0.
So the credit would reduce your tax burden to $0, a $2200 value.

There's good coverage of aspects of the tax credit in the Toyota_Prius_FAQ.

 

AMT or Alternative Minimum Tax is a totally separate tax system that was originally started about 25 to 30 years ago to force the wealthiest to pay taxes. It is a subject for Fred's house of Pancakes if you really want to go there. It is a separate system of calculating income taxes that runs "parallel" the the system most of us use. Your tax liability is calculated using whichever system gives you the highest tax owed. The credit is taken against your tax liability no matter which tax system you use.

 

If you're saying that if I owed AMT, the credit would reduce my tax liability below my AMT, I'm sorry to say that is not so.

This is a well documented limitation.
I have to scoot off to work now but I can provide reliable links to corroborate this later.

 

Your self employment taxes are added to your tax liability after the credit is taken, so you will still owe those no matter how big your credit is. Subtract the child tax credit and the retirement savings credit (neat credit - sort of like having the Federal government subsidize your retirement savings) from the tax on line 45. The result is the maximum credit you can get for buying a Prius. Your credit could be different if the IRS sets a lower limit for the Prius.

Remember that the 2006 tax forms and instructions aren't available yet, so I am basing my answer on the layout of the 2005 Form 1040. If the forms and instructions are different than I expect, then your credit could be different.

 

Regarding the AMT limitation:
From page 1419 of the Energy Policy Act of 2005
" (2) Personal Credit.-The credit allowed under subsection (a) (after the application of paragraph (1)) for any taxable year shall not exceed the excess (if any) of -
" (A) the regular tax reduced by the sum of the credist allowable under subpart A and sections 27 and 30, over
" (B) the tentative minimum tax for the taxable year.
Energy Policy Act of 2005

MSN Money - Save thousands on a hybrid -- if you hurry
SmartMoney.com - Tax Matters - What the New Energy Bill Means for You

Helpful links:
:HRBlock.com - H&R Block 2005 AMT Estimator

:Smartmoney.com - Tax Guide - The Alternative Minimum Tax
:TurboTax - FAQs on the Alternative Minimum Tax
:CNN Money - Alternative Minimum Tax 101

 

kiloran,

I am the first to admit that I haven't read the text of the law nor have I read alot of articles on the energy efficient car credit because I bought my Prius in 2004, my client base (over 70 and don't own computers) isn't likely to buy a Prius, and I am way too reliant on the computer program. I did pull out all my reference books and searched the IRS website could find no information on this, but then we are talking about 2006 tax returns.

Based on my understanding of what I read, if you owe AMT, you get no credit. And it appears based on my reading of the law, the credit is limited to the difference between regular tax and AMT if AMT is lower than the regular tax. For some people, a $2000 deduction might be worth more than what could be a very limited credit.

Thanks for bringing that twist to my attention. Typcial of the goverment, giving with one hand and taking away with the other.

 

Yes. You are absolutely correct.
For people likely to be subject to AMT in 2006, buying a hybrid in 2005 for the $2k deduction will be beneficial from a tax perspective.

There are other factors people consider in choosing between an '05 and an '06, including resale value, which some consider as well.
Everybody's circumstances are different so the tax incentive probably shouldn't be a person's sole criteria in deciding.

Thanks for all the good tax advice.
It's good to have a professional around! B)

 

I am trying to understand this tax credit thing for 2006. I don't think we pay AMT (I could be wrong) we both pay a lot on our taxes during the year so that we don't owe anything (usually).

So if someone doesn't use the AMT, would they still be eligible for the $3150 next year?

TIA!

 

Everyone has an AMT.
For most of us it is less than the tax liability calculated through the normal rules.
If your tax liability is >= $3150 and your AMT is $0, you'll be eligible for the full credit.

You might want to reduce your withholding to account for the credit.
See: 2006 Tax Credit Strategy, How to get your $ faster B)

There's good coverage of aspects of the tax credit in the Toyota_Prius_FAQ, including a link to an H&R Block AMT estimator.

 

It doesn't.
What it does is allow you to realize the tax credit (if you qualify) in 1/4 increments prior to filing your 2006 tax return. B)

 

Increasing your withholding exemptions on your W-4 decreases the amount of tax that is withheld out of every pay check you receive during the year. This makes your take home pay larger, but your Federal income tax withholding smaller. Ken's strategy is a good one. If you don't change your withholding to allow for at least some of the potential credit and have the same amount withheld during 2006 that you did during 2005 (all of this discussion assumes that your 2006 return looks almost exactly the same as your 2005 return which none of us have done yet :blink: ), then you will receive a large refund.

My personal tax philosophy is a large refund is nothing more than a tax free loan to the Federal government. I can have the use of my money during the year rather than have the Federal government use it and then return it to me. I have clients who actually set up their withholding so that they owe about $200 every year. That's not a check one cries while writing and its not enough to incur penalities. There are some people who want that big refund because it is the only they can save money to pay for Christmas, take a big vacation, or deposit money in a savings account or CD.

AMT is an interesting beast. The only time most of us think about AMT is when that line on the tax return has a number on it and you wonder where that number came from. In theory, AMT is calculated for every return and only appears on the return when someone's tax under AMT is higher than the tax under the regular system. Just because your return doesn't have an amount on the line for AMT, doesn't mean you don't have a tax liability under AMT; it simply means that the AMT tax is less than the regular tax, so you pay the regular tax only. Large amounts of taxes paid, alot of dependents, accelerated depreciation, some incentive stock options, and many other things trigger AMT.

Below are links to Form 6251 and the instructions if anyone is interested in taking a look.

IRS Form 6251

Form 6251 instructions

Enjoy

 

Well put.
I agree with your philosophy on loaning the government money without interest.

Thanks for the links.
I have added them to the Toyota_Prius_FAQ B)