Actually (refundable) EITC is often literally a welfare payment. Depending on income and family status, you may get back 100% of the tax you paid not counting EITC, then EITC is just a straight cash payment on top.
If you’re going to be that pedantic, be sure to specify that you mean refundable tax credits – and then perhaps acknowledge the second half of the compound statement you’re replying to.
But it's not a refundable credit. Which means you get whichever is the lowest of your tax liability or $7,500. Please note saying it's not refundable is term of art that does not mean what you might take it to mean. So let's walk through some examples.
Let's say your total tax liability for a year is $10,000. You paid in $11,000 via Payroll and other taxes. Without the credit you'd be due a refund of $1,000. If you are eligible for a $7,500 credit because you bought a Tesla you'd be due a $8,500 refund.
Let's say your tax liability for the year is $5,000. You've paid nothing in taxes for the year (probably because you knew you were buying the car and didn't need to). You bought a Tesla which makes you eligible for a $7,500 tax credit. You do not get anything refund from the IRS, but the $7,500 tax credit offsets your entire tax liability.
So just because it's a credit doesn't mean the credit is effective for low income people. You have to have enough income to have a high enough tax liability to even get the full $7,500.
The main difference is that not all credits are refundable. If you have a $7500 nonrefundable credit, but only have a tax liability of $5000, that extra $2500 just vanishes.
Some nonrefundable tax tax credits cap at zero or the AMT for that year.
Other nonrefundable tax tax credits can get rolled over into future years, so people with actual incomes can still pay zero in some years. Aka they go to zero and roll over savings to next year.
However refundable credits mean an actual check even in years you paid zero taxes: American opportunity tax credit, Earned income tax credit, Child tax credit, Premium tax credit. Aka they go to zero then send you a check.
reply