I apologize for my obviousl ignorance regarding tax terminology and taxes in general, but I have a question.

When someone says that I get a $2100 "tax credit" this year for purchasing a 2006 HCHII, does that mean that I can anticipate that my usual tax refund ($500-ish) will simply be increased by $2100, making my hypothetical refund $2600-ish?

Thanks for any clarification. I feel silly for not understanding something as straightforward and simple as the federal tax rules and regulations set forth by the IRS!

 

Yes, your example is accurate. That's how the credit works.

Alternatively, if you owed money in the end it would lessen the amount owed by $2,100.

The credit differs from a deduction in that a deduction would only lessen your taxable income by, in the case of the HCH, $2,100. E.g. if after the usual deductions your taxable income was $36,000 and you applied an additional deduction of $2,100 you'd pay income tax based on $33,900.

On a side note, I read on the IRA website that if you're subject to AMT (the alternative minimum tax) then you cannot use the credit. Which really stinks because for reasons that I'll never fully understand I get whacked by AMT every year. Didn't pick up on that until after I purchased my 06 HCH. Although, it wouldn't have changed my decision to go with a hybrid had I known prior, but it's a bummer nonetheless.

 

Yes, this is the way I understand it. Similar to a child tax credit, education tax credit, or any other tax credit!

 

Just to clarify a little further, I think if your tax liability is less than the amount of the tax credit, you cannot carry the excess forward to another tax year. For example, if your tax liability for this year is $1000 (regardless of whether you have hit that amount through payroll deductions or quarterly payments), you will only get a tax credit of $1000. The remaining $1100 would "disappear". My guess is that not many people buying a brand new $20k+ car would be in this situation, but you never know