I know where you're headed, I see what you're saying......and I agree.

I'm going to guess that a tax credit can only offset taxes owed at the end of the year, but what do I know?

Any Pro TAX people out there? Please help the commoners!

 

If there are any CPA's or IRS employees here that can say I am wrong I'll be the first to admit it, but I'm pretty sure about this....

It depends on your definition of "owe". If your federal tax liability for the year is $0, then there is nothing to credit against...and you won't get a check. But you probably couldn't afford to buy a new hybrid if you are in a tax bracket that results in you not owing any taxes.

On the other hand, the amount of money you "owe" due to underpaying during the year is completely irrelevant. If your tax liability for the year is $25,000 and you've had $25,000 withheld over the course of the year, the federal government WILL indeed write you a check for $2,000 if you have a hybrid tax credit that reduces your liability below the $25,000 that you have already paid.

 

OK.
Do not constitute this as tax advice. Everyone's tax situation is different and they should consult with their tax adviser before making any decisions regarding this topic.

For simplicity, I'm going to take some liberties. The numbers are not accurate and are only being used for demonstration.

Tax due is based on a percentage applied to your (adjusted) Gross Income.
Let's say Mrs. Z gets $40 an hour before taxes and works 1000 hours a year. She has no adjustments so her AGI is $40,000. The tax rate, let's say, is 30%. Mrs. T owes $12,000 in tax (40,000x.30).

Here's the tricky part. Let's say under the (A)lternative (M)inimum (T)ax rate of 26%, Mrs. T would owe $10,400. The tax law says she must pay at least $10,400.

Tax law also says she has to pay the higher of the two calculations. (Regular = 12,000, AMT = 10,400).

Now for the Alternative Motor Vehicle (Hybrid) Credit: This is only applied when the Regular tax (12,000) is higher than the AMT (10,400). Her tentative credit is $2,600. So take 12,000 less 2,600, she owes 9,400, right? Wrong, tax law says she must pay at least $10,400. She loses $1000 of her credit.

Mrs. Z's taxes:
Gross Pay: 40,000
Tax: 12,000
Credit: 1,600
Tax Due: $10,400

Whatever is on her W2 gets applied to the 10,400. If it's more or less determines who writes the check.

 

nomorebenz' last post is correct. I thought I'd point out a few things.

Regarding your vacation being taxed as a bonus... it only *seems* like it's taxed as a bonus. What really happens is the payroll systems take the amount of your individual paycheck and then MULTIPLY that amount by the total number of pay periods in a full year to come up with a project annual amount. This is then used to determine your tax bracket. They are then required to withhold that amount of money as tax.

This is what causes bonus payouts to be taxed particuarly heavy because they create the illusion that your annual income is a lot higher (based on the wrong assumption that you get that much in your check every pay period).

However, at the end of the year when you file your taxes, your tax calulation is based on the amount of income that you ACTUALLY earned (whereas the bonus check was taxed on a PROJECTION of your earning). This means you will have paid too much in that particular pay period (esp. considering your lay off means you were earning a lot LESS than they projected) and the over-payment in taxes in that one pay period would be returned to you.

As for the hybrid credit, think of this as a "store coupon" that is redeemable at the IRS. It merely reduces the amount of your tax debt by the amount of the credit, but you must actually have tax debt to that can be reduced. If you make such a small amount of money that you don't have to pay taxes (e.g. little old widows living on a small fixed income would probably not owe any taxes at all) then the tax credit is worthless. A credit isn't quite the same as cash in that if the amount of your credit exceeds the amount of tax for the year then they will not give you cash back in the amount of the excess.

But the really really big issue is that under no circumstances will the IRS allow you to pay less in tax then the AMT amount for your income. This is the reason that so many of us can't claim our hybrid tax credit *or* we can only claim a portion of the credit.