Hybrid Tax Credit if no tax is owed?

[wstcoaster07]

I have dug a little deeper in to this tax credit and have one major question that will definitely affect my purchase:

 

 

If at the end of the year I do my taxes and I have withheld 6k, but only owe 2k, the govt returns me 4k. Since I received a return, am I not eligible for an additional 1.7k return from my hybrid purchase? A lot of stuff I am reading online makes it seem that a credit is only to reduce the amount you owe the govt, not to increase the amt the govt owes you. Has anyone talked to a tax professional about this?

[robm15]

I have dug a little deeper in to this tax credit and have one major question that will definitely affect my purchase:

 

 

If at the end of the year I do my taxes and I have withheld 6k, but only owe 2k, the govt returns me 4k. Since I received a return, am I not eligible for an additional 1.7k return from my hybrid purchase? A lot of stuff I am reading online makes it seem that a credit is only to reduce the amount you owe the govt, not to increase the amt the govt owes you. Has anyone talked to a tax professional about this?

 

 

I am not a professional.

 

However, after 26 years of doing my own taxes, and having tax credits and deductions, I think you are confusing the two.

 

A deduction reduces how much you owe the government. A deduction subtract's from your gross income, and you are taxed based on your net income. So gross income, minus deductions such as personal deduction, and standard deduction (or itemized deductions of you itemize) determines where you fall on the tax table, and how much tax you owe. After you know how much tax you owe, you subtract out how much you paid, and then you know if you get a refund or have to write a check. But then comes the credit...

 

A credit is different. It gets added to your refund, or subtracts directly from what you owe. So in your example, if you are getting a $4K refund before the credit, now add the credit, your refund is now going to be $5.7K.

[akirby]

I have dug a little deeper in to this tax credit and have one major question that will definitely affect my purchase:

 

 

If at the end of the year I do my taxes and I have withheld 6k, but only owe 2k, the govt returns me 4k. Since I received a return, am I not eligible for an additional 1.7k return from my hybrid purchase? A lot of stuff I am reading online makes it seem that a credit is only to reduce the amount you owe the govt, not to increase the amt the govt owes you. Has anyone talked to a tax professional about this?

 

 

You're confused about the "amount you owe". The amount of tax paid in your case is 2k. It doesn't matter whether you withheld 6k and got 4k back or withheld 1K and had to pay 1K in April. The net result is you paid 2k in taxes. The tax credit goes against the 2K.

[skluck]

Tax credits are raw cash you get back. It is not a deduction, so it has no bearing on whether or do or don't owe taxes. If you owe nothing, they give you $1,700 back. If you owe $5,000. The $1,700 would help offset that you would owe only $3,300.

 

For example, I always overpay during the year and get back a couple thousand on my taxes. I also pay for my own schooling so I get a couple additional thousand for that as well. This year, instead of getting ~$3,000 back, I will get $5,000 because of the $1,700 hybrid credit, and ~$300 sales tax deduction.

 

So to clarify, tax credits you get back no matter what, it doesn't matter how much you do or don't owe.

Tax DEDUCTIONS however only lower your taxable income, and you can only reduce that so far (to zero, basically).

[wstcoaster07]

You're confused about the "amount you owe". The amount of tax paid in your case is 2k. It doesn't matter whether you withheld 6k and got 4k back or withheld 1K and had to pay 1K in April. The net result is you paid 2k in taxes. The tax credit goes against the 2K.

 

That was what I was referring to, thanks. I just realized that they took the credit from owed taxes without considering how much I paid.

[akirby]

That was what I was referring to, thanks. I just realized that they took the credit from owed taxes without considering how much I paid.

 

You need to separate what is withheld from what you actually pay in April. How much is withheld during the year has no bearing on how much tax you end up paying. Withholding is just an estimate of what you owe broken up into small payments each paycheck. You don't know what your final tax bill would be until you've factored in your total income and deductions, etc. When you get that final amount of tax that's actually owed it's compared to what you've already paid in withholding and you either pay more or you get some back. But it doesn't change the amount of tax you actually pay to the government in the end (not counting penalties of course).

[akirby]

Tax credits are raw cash you get back. It is not a deduction, so it has no bearing on whether or do or don't owe taxes.

 

So to clarify, tax credits you get back no matter what, it doesn't matter how much you do or don't owe.

 

I understand what you're trying to say but it came out wrong.

 

You are correct that it's a tax credit, not a deduction. This just means the credit is deducted from the amount of tax you owe the government for that particular year. Note this has nothing to do with whether you get a refund or have to pay more in April. It has to do with the amount of tax owed to the gov't for the prior year. The tax credit is deducted from that and then your withholding is applied to determine if you pay more or get a refund.

 

The catch is if for some reason you owe no taxes then you don't get the money. E.g. if your income was so low that you end up not paying taxes then you don't get the tax credit. It's like having a credit at a store where you don't shop. If you buy something that credit reduces your bill but if you never buy anything then you don't get it.

[jeff_h]

You are correct that it's a tax credit, not a deduction. This just means the credit is deducted from the amount of tax you owe the government for that particular year. Note this has nothing to do with whether you get a refund or have to pay more in April. It has to do with the amount of tax owed to the gov't for the prior year. The tax credit is deducted from that and then your withholding is applied to determine if you pay more or get a refund.

 

The catch is if for some reason you owe no taxes then you don't get the money. E.g. if your income was so low that you end up not paying taxes then you don't get the tax credit. It's like having a credit at a store where you don't shop. If you buy something that credit reduces your bill but if you never buy anything then you don't get it.

 

I believe Allen is right on... there are two types of tax credits: non-refundable and refundable. With a non-refundable (which most credits are) credit, it can lower your tax liability to zero but NOT pay you more than that. A refundable credit, such as the Earned Income Credit, is a refundable credit so even if your tax liability is down to nothing you will get the EIC money anyway.

 

http://www.investopedia.com/terms/a/altern...icle-credit.asp

[wnyvet]

You need to separate what is withheld from what you actually pay in April. How much is withheld during the year has no bearing on how much tax you end up paying. Withholding is just an estimate of what you owe broken up into small payments each paycheck. You don't know what your final tax bill would be until you've factored in your total income and deductions, etc. When you get that final amount of tax that's actually owed it's compared to what you've already paid in withholding and you either pay more or you get some back. But it doesn't change the amount of tax you actually pay to the government in the end (not counting penalties of course).

 

Although this is nothing new, confusion still abounds, even with tax "professionals" (term used lightly :hysterical:).

 

Pops works at H&R. In June, we went around & around on this. I had originally thought that during the tax-prep process, the $1700 credit would be used in it's ENTIRETY, thus, reducing my taxes paid, by $1700. He disputed that, and finally checked with the main office. In summary, they said that the $1700 hybrid tax credit I've recently qualified for, will have "absolutely no impact on my taxes, UNLESS, during the tax-preparation process, it's determined that I would have an additional tax burden upon the conclusion of my taxes. Then, and ONLY then, will that $1700 credit, have any impact whatsoever, in reducing my tax burden by up to the maximum credit of $1700".

 

They used last years taxes as an example, where I ended up sending Uncle Sam an additional payment of $300 after my taxes were prepared/accomplished. In that example, they said that at the very best case, during the tax-prep process, the $1700 credit would have been beneficial in that only a PORTION of the $1700 would have been able to be utilized, and that it would have wiped out the additional tax burden to zero. PERIOD. Nothing more, nothing less.

[rlawson4]

Although this is nothing new, confusion still abounds, even with tax "professionals" (term used lightly :hysterical:).

 

Pops works at H&R. In June, we went around & around on this. I had originally thought that during the tax-prep process, the $1700 credit would be used in it's ENTIRETY, thus, reducing my taxes paid, by $1700. He disputed that, and finally checked with the main office. In summary, they said that the $1700 hybrid tax credit I've recently qualified for, will have "absolutely no impact on my taxes, UNLESS, during the tax-preparation process, it's determined that I would have an additional tax burden upon the conclusion of my taxes. Then, and ONLY then, will that $1700 credit, have any impact whatsoever, in reducing my tax burden by up to the maximum credit of $1700".

 

They used last years taxes as an example, where I ended up sending Uncle Sam an additional payment of $300 after my taxes were prepared/accomplished. In that example, they said that at the very best case, during the tax-prep process, the $1700 credit would have been beneficial in that only a PORTION of the $1700 would have been able to be utilized, and that it would have wiped out the additional tax burden to zero. PERIOD. Nothing more, nothing less.

 

I could not disagree more. The tax credit is yours if you owed more than $1700 in taxes. How much you have had withheld is irrelevant. The key is that you had enough income to pay at least $1700 or $3400 in taxes. Over-withholding or under withholding or paying quarterly as I do has nothing to do with it. You get the credit. Now, had this been a refundable tax credit, then you would get the money regardless of tax burden or income for the year. In that example, you could run a business at a loss or have no income because you were unemployed, then file a return and get a check sent to you. This is a regular tax credit. If you paid more than $1700 or $3400 in taxes (based on the taxable income line on your return), you get the money. If you over-withheld, you get a refund. If you owe, you owe less. To this, I am quite certain. It may be the only thing I remember in tax class at law school.

[akirby]

Although this is nothing new, confusion still abounds, even with tax "professionals" (term used lightly :hysterical:).

 

Pops works at H&R. In June, we went around & around on this. I had originally thought that during the tax-prep process, the $1700 credit would be used in it's ENTIRETY, thus, reducing my taxes paid, by $1700. He disputed that, and finally checked with the main office. In summary, they said that the $1700 hybrid tax credit I've recently qualified for, will have "absolutely no impact on my taxes, UNLESS, during the tax-preparation process, it's determined that I would have an additional tax burden upon the conclusion of my taxes. Then, and ONLY then, will that $1700 credit, have any impact whatsoever, in reducing my tax burden by up to the maximum credit of $1700".

 

They used last years taxes as an example, where I ended up sending Uncle Sam an additional payment of $300 after my taxes were prepared/accomplished. In that example, they said that at the very best case, during the tax-prep process, the $1700 credit would have been beneficial in that only a PORTION of the $1700 would have been able to be utilized, and that it would have wiped out the additional tax burden to zero. PERIOD. Nothing more, nothing less.

 

That is WRONG. Period. It has NOTHING to do with whether you pay more or get a refund on your tax return - the only part that matters is how much tax you owe Uncle Sam for the previous year. There was either some other reason for this or they're just plain wrong.

 

3 examples with a $1700 hybrid tax credit for each one for the 2008 tax year.

 

1 - your employer withholds $4000 during the 2008 year. Your tax return says you only owe $3000 in taxes. Without the tax credit you'd get a refund for $1000. The tax credit is deducted from the $3000, so now you only owe $1300 in taxes but since you've already paid $4000 in withholding you'll now get a refund of $2700.

 

2 - your employer withholds $2000 during the 2008 year. Your tax return says you owe $3000 in taxes. Without the tax credit you'd have to pay an additional $1000. The tax credit is deducted from the $3000, so now you only owe $1300 in taxes but since you've already paid $2000 in withholding you'll now get a refund of $700.

 

3 - your employer withholds $500 during the 2008 year. Your tax return says you owe $0 in taxes because you didn't reach the minimum income limit. You get a $500 refund. Because you owe $0 taxes the tax credit is useless.

 

Bottom line - look on your tax form for the box where it shows how much tax you owe for that tax year. The tax credit is deducted from that first (it can't be less than $0), then the withholding amount is applied to determine whether you get a refund or pay more.

 

If it was a refundable tax credit (which the hybrid tax credit is not) then in #3 you would actually get $2200 back, but the hybrid tax credit doesn't work that way.

[fsb99]

That is WRONG. Period. It has NOTHING to do with whether you pay more or get a refund on your tax return - the only part that matters is how much tax you owe Uncle Sam for the previous year. There was either some other reason for this or they're just plain wrong.

 

3 examples with a $1700 hybrid tax credit for each one for the 2008 tax year.

 

1 - your employer withholds $4000 during the 2008 year. Your tax return says you only owe $3000 in taxes. Without the tax credit you'd get a refund for $1000. The tax credit is deducted from the $3000, so now you only owe $1300 in taxes but since you've already paid $4000 in withholding you'll now get a refund of $2700.

 

2 - your employer withholds $2000 during the 2008 year. Your tax return says you owe $3000 in taxes. Without the tax credit you'd have to pay an additional $1000. The tax credit is deducted from the $3000, so now you only owe $1300 in taxes but since you've already paid $2000 in withholding you'll now get a refund of $700.

 

3 - your employer withholds $500 during the 2008 year. Your tax return says you owe $0 in taxes because you didn't reach the minimum income limit. You get a $500 refund. Because you owe $0 taxes the tax credit is useless.

 

Bottom line - look on your tax form for the box where it shows how much tax you owe for that tax year. The tax credit is deducted from that first (it can't be less than $0), then the withholding amount is applied to determine whether you get a refund or pay more.

 

If it was a refundable tax credit (which the hybrid tax credit is not) then in #3 you would actually get $2200 back, but the hybrid tax credit doesn't work that way.

 

That's the way I understand it...although I learned something new about "refundable tax credit." Thanks!

 

I pay too much in federal taxes so I'm sure I'll get my full $3400 back :)

[wnyvet]

That is WRONG. Period. It has NOTHING to do with whether you pay more or get a refund on your tax return - the only part that matters is how much tax you owe Uncle Sam for the previous year. There was either some other reason for this or they're just plain wrong.

 

Thanks for your patient explanation, Allen, and for the 3 examples. You've reiterated precisely, the way that I believed it to work....exactly. I have absolutely no idea at all, why H&R doesn't understand it as such. They seemed a little confused, initially, as though they had no experience with the process. My taxes are fairly cut-and-dry, so I'll just probably give it a go myself this year.

[akirby]

My guess is there was just a confusion on terminology (tax owed vs. refunds, etc.) or somebody new who doesn't quite know the ropes yet. I can't believe they'd get something like that totally wrong - that's tax 101!

[jeff_h]

That is WRONG. Period. It has NOTHING to do with whether you pay more or get a refund on your tax return - the only part that matters is how much tax you owe Uncle Sam for the previous year. There was either some other reason for this or they're just plain wrong.

 

Thanks for your patient explanation, Allen, and for the 3 examples. You've reiterated precisely, the way that I believed it to work....exactly. I have absolutely no idea at all, why H&R doesn't understand it as such. They seemed a little confused, initially, as though they had no experience with the process. My taxes are fairly cut-and-dry, so I'll just probably give it a go myself this year.

 

I was a VITA (Volunteer Income Tax Assistant) for a couple years, each time I had to attend a week-long course conducted by the IRS, so I know some of the basics but that's been several years ago. But the refundable & non-refundable credit was one thing they hammered on to make sure we didn't tell people that they would get back more than they owed on taxes if they were claiming a non-refundable credit. But again, that was 7-8 years ago.

 

I'm afraid that some of the people that work at H&R or other similar businesses might be highly proficient at inputting the figures into the tax software and coming up with the final number, but when it comes to policy issues I don't know if some of them are as "well-rounded". I'm sure some of them are sharp as tacks, but I'm afraid that some also are good at running the software and that's about it.

 

But you got your answer now, so that's good!

[akirby]

Maybe I should moonlight at H&R......

[wnyvet]

Before I start getting confused, I mean, digging at the IRS website :hysterical: , does anyone know where the tax credit goes, on the 1040? Looking at the 1040, I'll assume that my $1700 credit will go onto either line #53 "Credits from Form" or onto line #54, "Other credits from Form"? Then I guess that after subtracting that figure from the figure on line #46, it will clearly establish that the credit is included in the tax preparation.

 

Thanks.

[jeff_h]

Before I start getting confused, I mean, digging at the IRS website :hysterical: , does anyone know where the tax credit goes, on the 1040? Looking at the 1040, I'll assume that my $1700 credit will go onto either line #53 "Credits from Form" or onto line #54, "Other credits from Form"? Then I guess that after subtracting that figure from the figure on line #46, it will clearly establish that the credit is included in the tax preparation.

 

You (we) will probably have to also file a form 8910, but as soon as the new pubs come out I (at least this is what I will do) is take the pdf file of the 1040 instructions and do a Ctl-F on "hybrid" and see what comes up. My guess (a guess until I actually get the forms) is that it will go in the same "credits" section as the foreign tax credit, child care expense credit, child tax credit, education credit, credit for elderly and disabled, and a few others. If tax time comes and it's not clear, post another message here as many of us are in the same boat and will also be claiming it.