Is that a 2006 1040, to be used for tax year 2006, for taxes filed in January 2007?

If all these tax websites are saying that the hybrid tax credit is non-refundable, are they just all wrong? That seems unlikely.

 

Larry, if you plug your numbers into a 1040 sheet, you will find yourself with a $ 600 or $ 4600 refund checks (from the two examples you outlined). Not a $600 or $ 2000 unrefundable credits.

Here is what's wrong with your arithmatics (no offense intended).

You are applying your withholding against your tax first, then applying the tax credit second. So your math: $ 7000 (tax) - $5000 (withholding) = $ 2000 (tax), then $ 2000 (tax) - $ 2600 (credits) = $ 0, you lose $600 unrefundable and useless credit.

But IRS (and form 1040) wants you to apply tax credits against your tax first, then apply your withholding second. So IRS math: $ 7000 (tax) - $ 2600 (credits) = $ 4400 (tax), then $ 5000 (Withholding) - $ 4400 (your tax) = $ 600. This is extra money government over withheld from you, and you will get that back.

In your 2nd example, you have $5000 tax, $ 7000 withholding, and same TCH ($ 2600 credits). You think your refund is $ 2000.

Following IRS 1040 math, your $ 5000 (tax) - $ 2600 (credit) = $ 2400 tax. Then $ 7000 (withholding) - $2400 (tax) = $ 4600. The government over withheld $ 4600 from you, so you will get a $ 4600 refund check.

While our numbers are the same (yours and mine), the order of arithmatics make all the difference.

And if you doubt the order of my math, just follow a 1040 form, and calculate. You will get the same $ 600 or $ 4600 refund checks. This is why in my posting (from yesterday), I tried to walk through a 1040 form. I too was confused until I walked through a 1040 form with an accountant, and realize the order of math make a big differnce.

So rejoice, you probably will get a hefty refund check next year, along with your nice TCH. I know I will enjoy my Prius that much more next year, and Teester will enjoy his Escape too.

 

From the IRS site:

http://www.irs.gov/newsroom/article/...157632,00.html

Notice it says "reducing or eliminating the taxpayer's tax obligation."

It curiously does not say or add "or even increasing the tax refund."

I'm still missing anything IRS or tax site or anywhere else which says the "tax credit will be seen as a dollar for dollar refund for those who overpay."

Still looking....

 

Teester is correct on this. You can not be penalized for witholding more than your liability.

 

Sorry but this is not correct.

the credit is subtracted from you liability, regardless of your withholdings. You can not be penalized for over withholding.

 

lars-ss,

You're confusing *Withholding* - money that is withheld from each paycheck to pay your income tax bill at the end of the year - with the *Tax* you actually owe after completing the computations in your tax return for that year.

Withholding does not actually "pay down" your tax bill; it's more like the money many people with mortgages put into an escrow account for their property taxes. At the end of the year, you fill out your tax return form, in which you calculate how much you actually *owe* the IRS, then if you have more in your withholding account, you get the difference back as your tax refund. A *tax credit* is applied dollar-for-dollar against the amount of money that the IRS *kept* after you finished your tax return - it has nothing to do with any refund you received, which is just the overage that had been withheld from your paychecks over the course of the year.

Teester & ck90211 are correct - if your withholding for the year was $3500, but your tax owed at the end of the year was only $3000, you would be entitled to a $500 refund. Then if you bought a vehicle that carried a $2000 tax credit, that credit would be applied to your tax bill - $3000 minus $2000 would equal $1000 that would be your net tax bill, & your total refunds would equal $500 plus $2000, or $2500.

If, instead of a refund, you *owed* an additional $500 more than your withholding, the tax credit would be reduced accordingly - $3000 (withheld) plus $500 (additional tax owed) equals $3500 (total tax) then subtract $2000 (tax credit) to leave $1500 (net tax bill); subtract that $1500 from $3000 (your total withheld) to get a $1500 refund.

Clear like mud? Well, I worked for the WI Dept. of Revenue for 2 1/2 years & we got Income Tax training every December. In over 20 years of state service I've learned that where the government is concerned, there is no easy way to say or do anything

 

Thanks to all for all the expertise and insight.

At this point, we still don't have a conclusion because although many of you say that the interpretation of the hybrid tax credit by the tax sites I visited are incorrect, so far no one has posted anything from the IRS that says FOR SURE how the 2006 tax credit (which is in it's first year, so we don't have a historical comparison, so no past years experience will help us) will be handled.

The IRS site is muddy and says nothing about whether the credit is non-refundable or not.

So we still don't really know. Darn. I'm probably going to have to call them.

 

Larry,
Sorry you find everyone's explanation unauthoritative, because we are not IRS agents. Although I am NOT a tax attorney, (just an attorney who took one recent semester of tax law- I am NOT involved in the practice of tax law and am writing this with no intent that it be used by taxpayers to avoid tax liability, *disclaimer,* disclaimer*) I'm sure that your understanding in this situation is wrong. I do not expect or want you to take my word for it, although working your own way through a tax form, as others in this thread have done, might help you think through it. I think DebbieKatz's explanation makes a lot of sense, though.

I might suggest that you do one of two things:
1- have your taxes done by a tax professional this year instead of trying to do them yourself. There are discount places that don't cost an arm and a leg, and if they get it wrong or things don't work out to your satisfaction, you can file an amended return within the next couple of years.
2- decrease your withholding just in case, to err on the side of your personal peace of mind. You may end up owing them a big check in April, depending on whether you do it right, and you'll have to be punctual and careful but otherwise there isn't a great deal of downside. Plenty of people don't have enough withholding to cover their tax liability and have to pay taxes in April- I just would hope the other readers of this thread who may be alarmed by your off-kilter interpretation of 'nonrefundable tax credit' do not feel obliged to follow your example.

Good luck!

 

Lars-ss this really isn't that complicated. Several people have explained exactly how the credit is applied, but for some reason you don't want to take it at face value. Teester, ck90211, and DebbieKatz are all correct.

How much you withold from your paycheck is irrelavant! Feel free to contact the IRS, but they are going to tell you exactly what has already been explained. The credit is subtracted from you Tax Liability. It's not as hard as you are trying to make it!

 

Depending on your situation, if you were to minimize to a level below last years tax liability, and you reduced the amount to far below this years liability you could incure penalities. I would not recommend reducing witholdings without fully being aware of the consequences.

http://www.fool.com/taxes/2002/taxes020208.htm