Tax Credit and Tax bracket

Your tax is basically the sum of different percentages of incremental amounts of taxable income, the highest of these percentages commonly referred to as your "tax bracket". The IRS can provide you with a table showing 2005 tax brackets, but the exact figures change slightly year to year.

None of this really make any difference when you are talking about credits, as opposed to deductions. A credit is an amount that is deducted from the tax you pay, while a deduction would reduce your taxable income (and thus possibly put you in a lower tax bracket). So if the IRS determines that a Prius bought new in early 2006 is good for a $3150 tax credit (it is good for a credit, but I don't think the exact figure is a known quantity), then that's like getting $3150 back from the goverment.

One caveat, which I am presently looking into, is that the dreaded AMT (Alternative Minimum Tax) may kick in, reducing the effective credit amount. The AMT, which Congress may soon abolish or change, basically penalizes taxpayers that have an excessive number of deductions and credits. I believe a Prius tax credit makes one more AMT-liable, if the AMT law does not change.

Hope that helps.

 

The credit will not reduce your tax liability below your AMT.
I have seen nothing that would lead me to believe it would change your AMT.

 

Don't want to be confrontational ... BUT ... how do you know that? Seems like a legit question to me, although I'm not an accountant. We were close to AMT last year and my wife just got a raise, so although we're still paying off school loans, and are a ways from financial "comfortableness" we may hit the AMT this year w/o this credit. Seems to me that unless it has been specifically (in the legislative act) exempted from impacting the AMT, that it WOULD ... but I'm not an accountant and haven't asked any about this. Would Like to ask one though. Are you one, or have you discussed this with one?

Thanks,

Steve

 

I'm not an accountant, but have been preparing taxes for 10 years. The credit is limited to the amount of regular tax over AMT. Or to say it another way, it cannot reduce your regular tax to below your AMT tax. If you do a search on the subject, you will find countless posts on the subject.

And yes, it is written in the legislation that way.

 

Fair question.
The answer is that I have read it. Both in the text of the law and repeatedly in various news articles over the last 6 months.

However, don't take my word for it, read it for yourself on page 1419, beginning with line 17 of the Energy Policy Act of 2005.

"(2) Personal credit.-The credit allowed under subsection (a) (after teh application of paragraph (1)) for any taxable year shall not exceed the excess (if any) of -
"(A) the regular tax reduced by the sum of the credits allowable under subpart A and sections 27 and 30, over
"(B) the tentative minimum tax for the taxable year.

 

I just posted this in another thread before I saw this thread. Sorry for the duplicate posting .....

Our friend is a CPA and I asked her about those who may be taxed using the AMT calculations. She was not sure but she thinks that the energy credit could be treated the same as other credits when calculating the final taxes owed.

1. calculate your taxes using regular deductions - home mortgage, etc.
2. calculate using the AMT deduction but remove home mortgage, real estate taxes etc.
3. pay the higher of the two.

4. then apply the credit - 3,150 for the Prius.

Again, she was not sure, but this is how other allowable credits are used. The credit is applied AFTER you have determined which of the tax methods apply to you. She thinks that it will in fact reduce whatever taxes you owe by the 3,150.

 

My response from that thread:
In a word, "wrong".
The $3150 credit will NOT reduce your taxes below your AMT.
(I can cite numerous references if you wish, including the text of the law.)

 

Please do. I am subject to AMT. The only way I can justify a hybrid is if I can get the credit. I would also like to educate my CPA friend of her error.

 

Right.

To start with, check out the 2006_Federal_Tax_Credit_Incentive section of the Toyota_Prius_FAQ.
One of the links will bring you to articles by a PC contributor / Financial Planner: Hybrid Car Tax Credit Limitations, No Carryovers, Recapture, and Tax Strategies

Also, from this very thread:
However, don't take my word for it, read it for yourself on page 1419, beginning with line 17 of the Energy Policy Act of 2005.

"(2) Personal credit.-The credit allowed under subsection (a) (after the application of paragraph (1)) for any taxable year shall not exceed the excess (if any) of -
"(A) the regular tax reduced by the sum of the credits allowable under subpart A and sections 27 and 30, over
"(B) the tentative minimum tax for the taxable year.

 

Generally speaking, unless you are "rich" you will get an approximate $3,100 tax credit off the top of taxes owed, not just a deduction.

You might find some useful info on the Prius FAQ
http://en.wikibooks.org/wiki/Toyota_Prius_FAQ

 

Could a moderator move this thread to a more appropriate forum, please?

 

You do not have to be rich to be subject to AMT. A large number of dependents or deducting lots of taxes on Schedule A can trigger AMT. Under AMT, you do not claim any deduction for personal exemptions nor can you claim any taxes paid as a deduction on Schedule A. There are several other things including but not limited to some medical expenses and mortgage interest not used to purchase or improve your primary residence that you must add back to income to caculate your taxable income under AMT. I have seen a person with an AGI of approximately $60,000 be subject to AMT.