Electric Vehicle Tax Credit: Several Questions

In My Humble Opinion (IMHO)
#1

Required Disclaimer: you are not a tax lawyer, you’re not MY tax lawyer, etc.

Optional Mini-rant: I tried calling the IRS but apparently they don’t answer these type of questions anymore except during tax season. I looked up going to my local IRS office, and they would let me go in to the local office, sit in front of a computer screen and talk to a representative – who doesn’t answer this type of question except during tax season. grrrrrrr… :mad:
</mini-rant>

So. I’m thinking of buying an electric car and I’m trying to find out how to take advantage of the electric car tax credit. Here’s my situation:

  • [Importantly] I have owed NOTHING in federal taxes in the last 2 tax years because my deductions have kept me below the minimum income at which you owe taxes.

  • I retired 3 years ago at age 62.

  • I have NO wage income.

  • I get Social Security and a very small amount of pension income.

  • I get some dividend and interest income from my investment / retirement money.

  • I have significant money in IRAs.

  • I have significant medical expense deductions, since I have paid for my own insurance. (I go on Medicare in October.)

  • I’m an Arizona resident.

If I buy an electric car and qualify for this juicy tax credit, how do I take advantage of it? (I know it doesn’t carry over if I don’t use it this year.) So here are my questions:

  • Does the tax credit apply only to wage income, or will it equally apply to dividend, interest, capital gain income, etc?
  • Can I generate taxable income by selling stock and use the tax credit to cover it?
  • Can I convert some traditional IRA money into a Roth IRA and use the tax credit to cover the taxes?
  • Can I withdraw money from an IRA and use the tax credit to cover the taxes?
  • Which of these ways of generating taxable income would you consider the best?
  • I’m assuming that using the tax credit is to my advantage. Can anyone make a reasonable case for why I should forego trying to use the tax credit?
    Looking forward to hearing your comments,
    J.
#2

I’m not an expert in the EV credit but I know enough about tax credits to give you some general info toward some of your questions.

A tax credit is a tax credit; they generally all operate the same way, and that way is simply to *reduce your tax liability *; that is, the number that appears on Line 44 of your 1040 tax return. It makes no difference what type of income you have. Note that if you have enough deductions (e.g., medical expenses) to reduce your taxable income to zero, you have no tax liability (i.e., you pay no income taxes for that year) and credits don’t help you at all [the exception here is a category of credits called Refundable Credits, but the EV credit is not one of these].

If you wanted to take extra out of your IRAs, sell stock and generate cap gains, whatever, to increase your taxable income, this will (all other things equal) increase your tax liability and yes, the credit would help you, assuming it results in you having a number on Line 44.

To take the credit, you’ll have to file a special form with your taxes (Form 8936), and the credit is based on the type of car you purchased.

Your other question about “Which of these ways of generating taxable income is best?” is not really a question anyone but you and your financial advisor can answer. To generate taxable income solely for the sake of taking advantage of the credit really only makes sense if you were going to do something like that anyway. For example, if you know at some point you have to or want to take out a chunk of IRA money to repair your roof, or gift it to your children, or you want to convert a traditional to a Roth IRA (for example), and have the luxury of determining which tax year to do it in, sure, take out the money and use the credit to help offset the tax hit.

Disclaimer: Consult your tax advisor before doing anything.

#3

Note these are starting to phase out for some manufacturers: