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Pre-pay loan using tax credit?

10K views 43 replies 16 participants last post by  randw 
#1 ·
Has anyone used their S tax credit in conjunction with a loan from Tesla? I know some lenders do not want you to pre-pay your principal. Has that been anyones experience with Tesla? I would ideally like to use the $7500 to reduce my payment, but would accept it shortening my loan length, but that doesn't work either if I can't apply it to the principal.

Anyone have any better strategies? I could loan myself the money and replace it with the tax refund but that's a lot of money to commit to a year plus waiting on the tax credit (i.e. buy the car in Jan but wouldn't get tax credit until probably April of the following year once taxes are filed)

Thoughts?
 
#2 ·
I am not a financial planner, but with interest rates running from .99% - 1.99% why would you prepay it? Use the money to make higher yielding returns. It's so close to free money at this point...
 
#7 · (Edited)
Since as far as I know there is no "Tesla Financial Services" and they outsource mainly with Allied Credit and USBank, your best bet is to find out at signing if there is early payoff fee and so on...

As far as your Tax refund question, your second paragraph pretty much answers it. There for my advise would be to not count on that money at all as far as making any decisions. That way once you get it, it'll be a nice lil bonus and THEN you'll decide what to do with it.

BUT DO NOT make moves and plan your life around the Tax Credit...
 
#8 ·
I have a better answer for you after rereading your post and getting a better understanding for your question.

  1. If you get your car in January 2018, you do not get the $7,500 as a tax refund in April 2018 as your return filed in 2018 is for your 2017 tax year (so be mindful of that)
  2. You cannot use the tax credit up front to reduce your loan amount (in other words it cannot be your down payment) because you cannot collect the money until you have registered the car
  3. A strategy -- say you get the car in January and that qualifies you for the $7,500 credit. Say you get paid bi-weekly. Just divide $7,500 by the remaining paychecks you will receive in 2018 and adjust your withholdings to take home extra money. You can then reduce your monthly payment by making extra principal payments throughout 2018. Now when 2019 rolls around though you're back to the original monthly payment amount and the only difference it's that you've knocked off a good chunk of the remaining term on the loan
 
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#10 ·
Talk to your HR where you work. We use ADP and it gives me the ability to go and set a specific amount to withhold on each paycheck, so it's not a guess... $7,500 / 26 = $288.46

If my car doesn't arrive in November or December of this year, I will adjust my withholding starting with the first paycheck in January.

When you file your taxes at the end of the year you will still "claim the credit", but you've paid less in taxes through each paycheck so now you've effectively collected the credit through equal disbursements throughout the year.
 
#17 ·
Disclaimer: I am not a tax professional, but this simplified example should help make sense of it for you.

Let's say you're single and you make $60,000/year salary and have $10,000 worth of deductions.

You're in the 25% tax bracket. You owe $5,226.25 plus 25% of the excess over $37,950, which is...

5,226.25 + (60,000 - 37,950 - 10,000) x 25% = $8,238.75

So you have a tax liability of $8,238.75 and will get the full $7,500 credit.

Let's say you're married filing jointly and have a combined income of $75,000 and have $14,000 in deductions.

You're in the 15% tax bracket. You owe $1,865 plus 15% of the excess over $18,650, which is...

1,865 + (75,000 - 18,650 - 14,000) x 15% = $8,217.50

So you have a tax liability of $8,217.50 and will get the full $7,500 credit.

Essentially your tax liability is what you owe after all deductions. It must be greater than $7,500 otherwise the credit maxes out at your tax liability. In other words if your tax liability was $6,000, then your federal tax credit maxes out at $6,000 and the lost $1,500 cannot be carried over to the next tax year. Adjusting your withholdings will NOT change your tax liability, but rather simply allows you to take home more money and have less paid out in taxes. This is a good strategy when you have something like a credit coming as you're not giving me government an interest free loan.
 
#20 ·
You have to hit a certain level of deductions before you can itemize your taxes and factor in your home interest. In your case, your tax person is saying the standard deduction gets you more than the itemized deduction.

I would double check with another tax person though. Once I got a house, I always qualified for itemized deductions but that's my personal situation.

"Everybody has to pay taxes, but that doesn't mean you gotta leave the government a tip"
 
#30 ·
No, he's saying that your tax liability (that is, what you owe to the government) would only be $4000 instead of $11,500 (because we subtracted $7500).

But line 64 is how much you gave to the government out of all of your paychecks, and that is $16,300.
So the government would owe you a check for $12,300.
 
#39 ·
Given enough lead time and only a bit of ground to make up, switching current 401(k) contributions from regular to Roth will be as effective as converting existing 401(k) balances from regular to Roth--assuming one has the choice of Roth contributions in the 401(k).

As regards IRAs, the poster mentioned he already contributes to a Roth IRA. If he has any regular IRAs, converting them to Roth IRAs would also effectively raise tax liability in the year of the conversion. You want to make sure the "year of the conversion" is the same year you take possession of the car and earn the tax credit: do the conversion in the same calendar year.

Each dollar of additional income generates x% of additional tax liability, where x = your marginal tax rate (aka, your "tax bracket"): https://taxfoundation.org/2017-tax-brackets/. Keep in mind that capital gains and losses, qualified dividends, Social Security income, and many other things can affect the calculation of total tax liability in unexpected ways. All the advice given so far is assuming "all else is equal" from year to year. Watch out for things that are different between tax years.
Unfortunately my employer does not allow the option of a Roth-401K. They do however allow to contribute to 401k as AFTER TAX, which can be rolled into the Roth as a "back-end rollover?", which I don't fully understand yet. I contribute 100% annual allotment to Roth, hence no traditional IRA therefore your suggestion wouldn't work. One option I've been thinking of is to sell all holdings (aka $TSLA, $NVDA :) after 1/1/18 and repurchase with the idea to lock in Cap-Gain on those. Also I'm seriously considering selling a rental property next year which may raise my liability by a good amount in itself.
 
#40 ·
Most 401k's allow you to take a loan from your funds, and you pay yourself back with interest. So, I think that's a conceivable temporary option. Make the payments until you get the tax credit, then repay in full.

However, at 1.5% to 2.5% interest, a car loan is probably some of the cheapest money you're going to get loaned to you. If you have a higher interest rate loan (student loans, equity line, credit cards), IMHO you're much better off paying down your highest interest loan with the tax credit instead of your lowest interest loan.
 
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#42 ·
Most 401k's allow you to take a loan from your funds, and you pay yourself back with interest. So, I think that's a conceivable temporary option. Make the payments until you get the tax credit, then repay in full.

However, at 1.5% to 2.5% interest, a car loan is probably some of the cheapest money you're going to get loaned to you. If you have a higher interest rate loan (student loans, equity line, credit cards), IMHO you're much better off paying down your highest interest loan with the tax credit instead of your lowest interest loan.
Not the best route as you essentially pay tax twice. The "loan" is payed with post tax earnings, then gets taxed again at withdrawal.
 
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