Welcome to a Q & A tax session at Luke1428. Today we are discussing how to fund the purchase of an electric car with tax credits. Some states offer tax credits as incentives for many transactions, including purchasing or leasing an electric car.
To answer your tax credit questions I’ve pulled in none other than Mrs. Luke 1428, who just happens to be a CPA. So here we go.
Q: What are tax credits and how can I use them?
A: Great question. First, I’d like to make sure that we’re clear on the difference between a tax credit and a tax deduction. As an example, let’s assume you have $50,000 of taxable income, and your tax rate is 10%. Let’s compare the difference between a $1,000 tax credit and a $1,000 tax deduction.
A tax deduction lowers your taxable income. Without any deductions, your tax would be 10% of $50,000, which is $5,000. So, a $1,000 tax deduction lowers your taxable income to $49,000. Then we apply the 10% tax rate and come up with a tax of $4,900.
Tax Deduction Savings: $100.
Now, instead of the tax deduction, let’s try a tax credit.
A tax credit is a dollar for dollar credit against your tax, not against your income. So, if your taxable income was $50,000, the 10% tax again means a tax of $5,000. The $1,000 credit reduces the tax itself to $4,000.
Tax Credit Savings: $1,000.
Conclusion: a credit gives more oomph to your bottom line than a deduction.
How to Find a Tax Credit
Finding a credit that works for you can be tricky. If you have children, then make sure you investigate the Child Tax Credit and the Child and Dependent Care Credit. If you work, and your income is below a certain level, you may be eligible for the Earned Income Tax Credit. If you go to school, there are some education credits available as well. Those are some of the more popular federal tax credits. Take a look here at the IRS site for more credits that you may be eligible for.
One area that is overlooked are state tax credits. In fact, the electric car in this picture is owned by one of the CPAs I work with in order to take advantage of a state tax credit here in Georgia.
Many states have some sort of alternative fuel tax credit available. Georgia’s is particularly nice because the credit can be for the purchase or the lease of an electric car. The credit amount is high enough so that it offsets the price of the lease. Free vehicle…cool!
In addition, there is no expense for gas, and just a minimal expense for the electricity to charge the vehicle – an estimated $1 for every 25 miles. There is also the side benefit of it being a cleaner running engine which is beneficial to the environment. Of course, there is still the need for vehicle insurance and trips need to be planned out since the vehicle can only go about 90 miles on a charge. But for many people this can work out to be a good option for a commuting car.
To find tax credits for your state, I would do a Google search for [your state] and “tax credits”. Make sure you are looking for individual credits, not corporate tax credits.
What good tax credits are available in your state? What about leasing — would you lease a vehicle if you were going to get a tax credit to cover the payments?
Author Bio: My name is Kim and I’m a licensed CPA in the state of Georgia. I work at Loggins, Kern & McCombs, CPAs. If you have a tax question that you would like to submit, please click here and send it to me. Whatever advice I give, please remember to consult with your own tax professional as issues vary depending on your situation.