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.
The Nissan Leaf – source of a nice little state tax credit
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.