Questions:
Bob is preparing to file his U.S. federal income taxes for the most recent tax year. He has done his research and is eager to maximize his refund. He plans to claim the standard deduction, as his itemized deductions would only total $3,000. He does not intend to claim any above-the-line deductions.

Bob's federal income tax liability, before applying any credits, is calculated to be $5,750. Throughout the year, he worked two jobs and had $5,100 in federal taxes withheld from his wages. With this in mind, Bob believes he will owe $650 in federal taxes before applying an tax credits.

During the tax year, he purchased a new electric SUV that qualifies for an $8,500 offset tax credit, which Bob confirmed he's eligible for.

After factoring in the tax credit for his new SUV, Bob recalculates his tax liability to be -$1,750. This means he will receive a refund of $7,850. Is Bob's calculation correct?

What if, instead of an $8,500 non-refundable tax credit, Bob was eligible for a $7,500 fully refundable tax credit? Assuming everything else remains the same, what would his new refund amount be?

Reference answers:
Bob's calculation is incorrect. He appears to be assuming that the $8,500 electric vehicle tax credit is fully refundable. However, the question specifies it as an "offset tax credit," meaning it is non-refundable. A non-refundable tax credit can reduce Bob's tax liability to zero but cannot result in a negative liability.

After applying the $8,500 credit, Bob's tax liability is reduced to $0. Since the credit cannot be refunded beyond eliminating the tax liability, Bob's refund will consist only of the $5,100 in federal taxes that were withheld during the year. Therefore, Bob's actual refund will be $5,100.

If Bob now qualifies for a $7,500 fully refundable tax credit instead of the $8,500 non-refundable tax credit, we can calculate his new refund with the following information:

*Initial tax liability: $5,750
*Federal taxes withheld: $5,100
*Refundable tax credit: $7,500

Bob's $5,750 tax liability will be offset by the $7,500 refundable tax credit:
7,500 - 5,750 = 1,750
This leaves a refundable balance of $1,750.

Bob's refund will include the $5,100 withheld from his wages plus the remaining $1,750 refundable portion of the credit:
5,100 + 1,750 = 6,850

Bob’s new refund amount will be 6,850.