What does price after tax credit really mean? What exactly is a tax credit? How much money do I have to make in order to take full advantage of a tax credit? These are all questions that potential buyers of the Chevrolet Volt and Nissan Leaf need to be asking and chances are the dealership is the last place to start.

All the hype and fantastic technology that has been buzzing around both the Volt and Leaf has the media and potential buyers worked up into a frenzy of environmental desire. Both of these cars will qualify for the Federal government’s “plug in tax credit� of $7,500 when they go on sale, but is it really fair to allow Chevrolet, Nissan, and the media to brand this as discount off the suggested retail price?

First, consumers need to understand what a tax credit is. Many people are familiar with a tax deduction, as everybody who files a tax return either receives a standard deduction or can choose to itemize their deductions. Tax deductions reduce the amount of gross taxable income on which your final tax bill can be calculated. A tax credit however, reduces the amount of total tax you owe regardless of your income.

The most important thing for consumers to remember if they are interested in purchasing a car that qualifies for the “plug in tax credit� is for them to think of it as a mail-in rebate and not a coupon. Buyers will still be responsible for paying for the price of the car up-front. The $7,500 discount only will truly be seen after you file your taxes for the year you purchased your car. For example, if you buy a qualifying car in January of 2010, you will have to wait until 2011 to claim your tax credit on your 2010 taxes.

Now that we all know how the tax credit works when purchasing a Volt or Leaf, let’s discuss who will really benefit the most from these tax credits. When it comes time to file taxes for the year a qualifying car was purchased, the $7,500 tax credit must be utilized completely. If the buyer only owes the Federal government $3,000 in taxes, they don’t get to save the remaining $4,500 in tax credits. The “plug in tax credit� does not carry over and does not add additional money to your refund than you would have owed without a credit.

So what amount of income does a future purchasers of a Volt or Leaf have to make in order to take full advantage of the government’s rebate? Using tax information for the 2010 tax year, single tax filers must claim an adjusted gross income of $45,276. If you add in the standard deductions, a single person has to make between $51,000 and $55,000 thousand minimum to recover the full $7,500. If married and filing jointly, an adjusted gross income of $55,583 is needed to fully take advantage of the credit. In real world income, that would mean the family would have to make over $67,000.

It’s unfortunate that it’s ok for car companies and the media to gloss over the real meaning of a tax credit. Less than half of Americans qualify to fully take advantage of tax credit for a Volt or Leaf which means consumers need to be careful. The price of the car isn’t really less because of the tax credit, it just appears to be less. If one’s true motivation for purchasing a new wave environmental car is frugality, make sure to check with an accountant or do some research before buying and expecting a windfall discount courtesy of the government.

Taxable income required to get $7,500 EV credit

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