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401k and Tax Rebate Discussion

Discussion in 'Model S: Ordering, Production, Delivery' started by Larry Chanin, Aug 30, 2012.

  1. Larry Chanin

    Larry Chanin Model S Perf Sig 1055

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    This is similar to an academic concern that I've been wrestling with in my mind regarding my own personal situation. Maybe those who are more tax savvy than me can sort this out.

    Being retired I'm precisely in the situation that you describe, that is I do not have enough income to generate a $7,500 tax liability. So inorder to take advantage of the full tax credit I have to generate additional tax liabilities. I can do this by withdrawing from my 401K. By withdrawing the balance owed on my Model S, plus an additional allowance to deal with the increased tax burden of moving into a higher tax bracket generated by the additional income, I can create the necessary tax liability to take the full credit. So the question to the tax experts is, "Have I really saved anything by taking advantage of the full tax credit if I have to increase my tax liability to get it?"

    In your situation the inverse question can be asked, "Will I really lose money by not being able to take the full tax credit if I move into a lower tax bracket and reduce my overall tax liability?"

    Larry
     
  2. Mycroft

    Mycroft Life happens

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    Yes Larry, you gain because it gives you the opportunity to take money out of your 401K basically tax free, where you would be paying taxes on it before. That is, unless you would normally pay no taxes at all in a typical year.
     
  3. Larry Chanin

    Larry Chanin Model S Perf Sig 1055

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    Thanks for the response.

    In aviator's case is he actually losing money by reducing his tax liability, or is it a break-even proposition?

    Thanks.

    Larry
     
  4. NigelM

    NigelM Recovering Member

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    ^^^ Larry, IMO Mycroft is both right and wrong. Let's say your wife buys an expensive dress and when you complain she tells you that she saved money because it was on sale. Are you better off or worse off? Well it all depends on whether she need a new dress.

    As Mycroft says it gives you the opportunity to take money out of your 401k effectively tax free, but it's only good for you if you want/need/have to take money out of your 401k.
     
  5. Mycroft

    Mycroft Life happens

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    In aviator's hypothetical, (where the purchaser had some amount of tax liability in 2012, but will have no tax liability in 2013), that purchaser would definitely be losing money by having the delivery pushed out until 2013.

    As in your situation, with most circumstances like that, there should be some opportunity to move funds from pre-tax to post-tax (earlier than planned), and take some advantage of the $7,500 credit.
     
  6. Mycroft

    Mycroft Life happens

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    There is no down-side to moving the money out of the 401k to take advantage of the $7,500 credit. If the money was in a fund in the 401k, then you can invest in the same fund, (post-tax), in a non-retirement account.
     
  7. Jaff

    Jaff Active Member

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    Please define "need" Nigel...



    (my wife and I do not appear to have a congruent definition...) :wink::biggrin:

     
  8. brian45011

    brian45011 Member

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    If you are withdrawing from a 401k (or a pre-tax traditional IRA) and plan to re-invest the money, I suggest doing so in a Roth IRA. Without more specifics, it's difficult to quantify how much better off the withdrawal is compared to merely not fully using the credit--the withdrawal may make more of your Social Security benefits (if any) taxable; on the other hand, depending on your tax qualified balances, it will reduce Required Minimum Distributions at age 70.5. With a $16 trillion national debt and mounting annual deficits, tax rates for those who can afford a Model S are unlikely to decline. Taxes on qualified balances are like the Fram filter, pay them now or pay them later, there is no "want/need/have."
     
  9. Andrew Wolfe

    Andrew Wolfe Roadster 472 - S 440

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    The down side is that you will now have to pay takes on the dividends, etc. generated by that investment every year instead of deferring them until retirement and reinvesting them.
     
  10. Trnsl8r

    Trnsl8r Blue 85kwh since 12/8/12

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    Not if you put the funds in a ROTH IRA, right?
     
  11. NuclearPowered

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    Correct.
     
  12. Mycroft

    Mycroft Life happens

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    Right. There won't be too many folks in the situation, but it's possible to convert 401k->IRA->Roth, which generates the taxes that can be offset by the $7,500 rebate. Then all future gains of that money will be tax-free.
     
  13. Super Gizmo

    Super Gizmo Member

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    Can an unmarried couple living together but filing as individuals claim a percentage of the credit each?
     
  14. NigelM

    NigelM Recovering Member

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    I would assume no, unless you own the car jointly and I don't think that's possible. Otherwise one person would be claiming a tax credit against a car owned by someone else.
     
  15. Super Gizmo

    Super Gizmo Member

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    We would own the car jointly just like our house and other things.
     
  16. NigelM

    NigelM Recovering Member

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    Well I just learned something new. I don't know why, but I had always assumed that two people couldn't jointly own a vehicle. It would make sense to split the tax credit (but then whoever said that tax law makes sense).
     
  17. Andrew Wolfe

    Andrew Wolfe Roadster 472 - S 440

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    True - but:
    The post I quoted said "non-retirement account"
    There is a limit on Roth contributions and they cannot exceed income.
     
  18. kcveins

    kcveins delivery 2/7

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    Actually, they have removed the income limits on rollovers to a Roth, although the contribution limit is still present. You obviously have to pay the tax on the rollover amount.
     
  19. neroden

    neroden Happy Model S Owner

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    Make a spreadsheet.

    You run two or more scenarios (or more, as necessary), including appropriate assumed rates of interest in the 401k and outside of the 401k, and figure out your total after-tax return when you're done. It's a simple spreadsheet problem. Don't forget state taxes. You may also need to consider the AMT and the preferential rates on capital gains and dividends -- and the projected *future* status of those rates.

    I find that *usually* you benefit if you can take money out of a retirement account, not pay federal taxes while doing so, and reinvest it. Unless the retirement account offers funds with a much better return than you can get outside the retirement account...

    - - - Updated - - -

    You can buy the car jointly in one of two different ways: as tenants in common or as joint tenants with right of survivorship.

    If you buy it as tenants in common, you each own a percentage of the car. If you paid half and the other person paid half, you literally each own half a car.

    I do not know if there are special rules for this tax credit, and you had better get expert tax advice. If it works like most tax credits, you would then each get half of the tax credit. If it worked like some rarer tax credits, one of you would have to take the whole tax credit and the other one would have to agree to it. If it worked like yet other tax credits, both of you could get the entire credit. If it worked like yet other credits, neither of you would get a credit. It's also possible that you would be construed to each be buying a car which cost half the price of the Tesla, in which case the tax credit (since it's based on value) might be computed to be a number based on this smaller value..

    If you own it jointly with right of survivorship, the *tax laws* generally treat it the same way as owning it as tenants in common -- they look at who contributed the money to buy it and consider you to own it by percentages. However, the *legal rules* (inheritance and so on) are completely different, which could have a further effect on whether you "qualify" as having bought an electric car.

    In short, you need advice from someone who really knows their stuff.
     
  20. Robert.Boston

    Robert.Boston Model S VIN P01536

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    Glad to have you back here, Neroden.
     

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