Tax credits

[talkingevs]

So this relates to both the model 3 and solar panels. I just read about the news of timelines being pushed up from 12-18 months to just 3-6 mo for US customers. With that being said, we put in our reservation in January for the model 3 so we have only been waiting 4 months so far. But....we are having Tesla install solar on our house on Friday. We had planned to take the 30% solar tax credit on this year and next year's taxes. But if we get a model 3 this year, then we have to somehow incorporate that $7500 tax credit too. I know it's a good problem to have but any suggestions? The solar panel credit will be around $9000 and i know it's a non refundable credit as well. It can be rolled over at least one year, whereas the vehicle credit can't. So...

1) When they say tax liability does that mean total for the year or just what you might owe at year end? For instance, let's say we pay around $11,000 in Federal taxes per year. When tax time comes we usually get a refund of 1-2k. In this situation would we get a refund of all $11,000 or just not owe anything? I guess what this question is asking is does the credit go towards the year round tax liability or just the year's end?

2) Any suggestions on how to lower taxes coming out of our checks year round until the credits are done?

3) what have you guys been doing?

Thanks ahead if time and we can't wait to become part of the Tesla family.

 

[TT97]

What you pay during the year is just an estimate, the amount you calculate on your Form 1040 is your actual tax (Line 63).

In your example, if they collected $11,000 in taxes for the year and you got a $2,000 refund - your tax obligation for the year was $9,000. The EV tax credit and solar credits will reduce the $9,000 (so the EV will reduce $7,500 to $1,500 and then Solar to zero with the rest rolling over to 2019 tax year).

If you want to lower the taxes that are taken out of your paycheck, you can increase the number of allowances you are claiming on the W-4 form. If you do decide to go down this route, make sure you fully understand the implications and you will need to adjust back down after you use up the credits (increasing allowances only lowers the taxes taken out of your paycheck, not your annual tax obligation - if you have too little withheld, there will be a penalty payment when you file your taxes).

 

[talkingevs]

Ok. Reading through the IRS materials it sounded like if you paid $11,000 throughout the year, you don't get that back since it's a nonrefundable credit. I understand about the dangers of withholding too little. We will have to pay the 30% towards the solar loan by month 18 to keep the low monthly payment. So that's the issue I'm forseeing is trying to use up both credits by month 18....

 

[talkingevs]

What you pay during the year is just an estimate, the amount you calculate on your Form 1040 is your actual tax (Line 63).

In your example, if they collected $11,000 in taxes for the year and you got a $2,000 refund - your tax obligation for the year was $9,000. The EV tax credit and solar credits will reduce the $9,000 (so the EV will reduce $7,500 to $1,500 and then Solar to zero with the rest rolling over to 2019 tax year).

If you want to lower the taxes that are taken out of your paycheck, you can increase the number of allowances you are claiming on the W-4 form. If you do decide to go down this route, make sure you fully understand the implications and you will need to adjust back down after you use up the credits (increasing allowances only lowers the taxes taken out of your paycheck, not your annual tax obligation - if you have too little withheld, there will be a penalty payment when you file your taxes).

So with that example we would get a refund of 9000 for year one then right?

 

[TT97]

I don't follow the non-refundable credit. What your employer withholds has no bearing on your tax obligation. You can have your employer withhold as much as you want and any excess withholding will be refunded when you file (of course, you will be giving the IRS an interest-free loan). Based on your assumption, you should have zero tax obligation for 2018 tax year (which you will get the refund Feb-Apr 2019) and the rest in 2019 tax year (refund in Feb-Apr 2020).

So with that example we would get a refund of 9000 for year one then right?

In the example, you refund will be all $11,000 as your tax obligation is zero (of which $9,000 is attributable to the EV and Solar credits)

 

[talkingevs]

I don't follow the non-refundable credit. What your employer withholds has no bearing on your tax obligation. You can have your employer withhold as much as you want and any excess withholding will be refunded when you file (of course, you will be giving the IRS an interest-free loan). Based on your assumption, you should have zero tax obligation for 2018 tax year (which you will get the refund Feb-Apr 2019) and the rest in 2019 tax year (refund in Feb-Apr 2020).



In the example, you refund will be all $11,000 as your tax obligation is zero (of which $9,000 is attributable to the EV and Solar credits)

Ok I see now. So we need to figure out how to increase our tax liability not the amount we withhold. Any smart ideas lol?

 

[TT97]

Best way to increase your tax liability is to make more money, but, typically people try to reduce their tax liabilities (which EV and solar credits are two of the big ones).

 

[GenSao]

Ok I see now. So we need to figure out how to increase our tax liability not the amount we withhold. Any smart ideas lol?

Some ideas:

• Sell off investments in a taxable account to pay the capital gains tax. The stock market has had a good run, no guarantees it will stay that way (depends on your opinion of the current US administration).
• Do a conversion of a Traditional IRA to a Roth IRA. Pay taxes now for future tax free withdraws.

 

[kengchang]

ITC can be carry forward to the next year

Take the $7500 and make more money next year /s

 

[jamnmon66]

Seems like a no brainer to take the tax credit for the car this year and postpone the tax credit for the solar until the 2019 tax year.

All your paycheck withholding does is pay an estimated amount of your taxes so that you don't have a huge tax bill at the end of the year. You're essentially just making payments ahead of the bill. The amount you will actually pay in taxes is calculated when you file. If the amount you owe is more than you had withheld over the year, then you have to pay the difference. If you owe less than was withheld then you get a refund. For the tax credits, your withholding is irrelevant... as TT47 said above, the amount calculated on your 1040 is what matters.

I'm in a similar situation in that I put down two M3 reservations on 3/31/16. I just received the first car which qualifies us for the $7500. I'm waiting to hear back from our accountant to see if she can estimate our taxes for this year. If we'll owe $8,000 then we can only get a benefit of $500 for the second car and we might as well wait until January when we can at least get a $3,750 credit. If our tax bill will be $15,000 then it's an easy decision to get the second car now.

My wife quit her job to start a new business last year so I can't compare to previous years... hence, the accountant.

 

[boaterva]

Right, why change anything? I did the same, going back and asking Turbo Tax how things would have changed if had installed Solar this year when I had the car’s $7500 and it said part of the ITC would be covered (refunded) and the rest rolled to next year.

Not sure why you would need to alter anything. As was said, if you want the money ‘now’, you can alter withholding to get the cash monthly in your paycheck and not when you file. But that’s just personal preference.

 

[ItsNotAboutTheMoney]

So this relates to both the model 3 and solar panels. I just read about the news of timelines being pushed up from 12-18 months to just 3-6 mo for US customers. With that being said, we put in our reservation in January for the model 3 so we have only been waiting 4 months so far. But....we are having Tesla install solar on our house on Friday. We had planned to take the 30% solar tax credit on this year and next year's taxes. But if we get a model 3 this year, then we have to somehow incorporate that $7500 tax credit too. I know it's a good problem to have but any suggestions? The solar panel credit will be around $9000 and i know it's a non refundable credit as well. It can be rolled over at least one year, whereas the vehicle credit can't. So...

1) When they say tax liability does that mean total for the year or just what you might owe at year end? For instance, let's say we pay around $11,000 in Federal taxes per year. When tax time comes we usually get a refund of 1-2k. In this situation would we get a refund of all $11,000 or just not owe anything? I guess what this question is asking is does the credit go towards the year round tax liability or just the year's end?

2) Any suggestions on how to lower taxes coming out of our checks year round until the credits are done?

3) what have you guys been doing?

Thanks ahead if time and we can't wait to become part of the Tesla family.

I blame the educational system.

Tax liability is the amount you are required to pay for the year.

The amount you paid during the year is only relevant to the final reckoning of whether you get a refund or have to pay extra to The Man. The tax credit stuff comes _before_ that.

* Expect that you're expected to pay as you go and be close to the liability, even though you aren't guaranteed to know what that liability will be until December, when Congress finally passes a budget.

 

[Austindude]

So this relates to both the model 3 and solar panels. I just read about the news of timelines being pushed up from 12-18 months to just 3-6 mo for US customers. With that being said, we put in our reservation in January for the model 3 so we have only been waiting 4 months so far. But....we are having Tesla install solar on our house on Friday. We had planned to take the 30% solar tax credit on this year and next year's taxes. But if we get a model 3 this year, then we have to somehow incorporate that $7500 tax credit too. I know it's a good problem to have but any suggestions? The solar panel credit will be around $9000 and i know it's a non refundable credit as well. It can be rolled over at least one year, whereas the vehicle credit can't. So...

1) When they say tax liability does that mean total for the year or just what you might owe at year end? For instance, let's say we pay around $11,000 in Federal taxes per year. When tax time comes we usually get a refund of 1-2k. In this situation would we get a refund of all $11,000 or just not owe anything? I guess what this question is asking is does the credit go towards the year round tax liability or just the year's end?

2) Any suggestions on how to lower taxes coming out of our checks year round until the credits are done?

3) what have you guys been doing?

Thanks ahead if time and we can't wait to become part of the Tesla family.

We moved money from a standard IRA account to a Roth IRA which meant taxes were immediately due. This move was done to offset the EV tax credit. Seemed like a good idea for our tax situation, don't know if that would work for you.

 

[SomeJoe7777]

We moved money from a standard IRA account to a Roth IRA which meant taxes were immediately due. This move was done to offset the EV tax credit. Seemed like a good idea for our tax situation, don't know if that would work for you.

I'm not a tax professional, so take this with a grain of salt. Converting a traditional IRA to a roth IRA can have tax-positive or tax-negative benefits, depending on the individual tax situation. To review:

Traditional IRA allows you to put pre-tax money into investments, which then grow tax-free, and you will then get taxed at ordinary rates when you withdraw the money in retirement.

Roth IRA requires you to put post-tax money into investments, which then grow tax-free, and get you tax-free withdraws in retirement.

So the difference is WHEN the money is taxed -- now, when you deposit it, or later, when you withdraw it. In both cases, there is no capital gains tax (tax on the growth).

The difference then boils down to how much you are taxed. If you make a lot of money right now and pay higher tax rates, a traditional IRA makes sense -- you get taxed later when you withdraw the money in retirement, when most people spend less then they were in the middle of their career and therefore get taxed at lower rates.

If you're young and just starting your career, so you don't make too much money right now, you're getting taxed at low rates now. A roth IRA then makes more sense so that the money you put in now is taxed at low rates, and is then tax-free when you withdraw it in retirement where you'll be spending more than you are now.

 

[jamnmon66]

• Do a conversion of a Traditional IRA to a Roth IRA. Pay taxes now for future tax free withdraws.

We moved money from a standard IRA account to a Roth IRA which meant taxes were immediately due. This move was done to offset the EV tax credit. Seemed like a good idea for our tax situation, don't know if that would work for you.

This is a good idea. I'll talk to my accountant about it if it turns out to be relevant. Thanks for the advice.

 

[drawfour]

If you're young and just starting your career, so you don't make too much money right now, you're getting taxed at low rates now. A roth IRA then makes more sense so that the money you put in now is taxed at low rates, and is then tax-free when you withdraw it in retirement where you'll be spending more than you are now.

As you said, all depends on the individual's situation. If one can afford to max out their IRA, then it's better to put it in a Roth. That's because the same dollar amount can be put into the account, regardless of type. For a Roth IRA, it's $5500 that grows tax-free. For traditional, it's $5500 - income tax due at time of disbursement. So unless you manage to get 0% income tax at disbursement, then Roth is better. And even then, Roth only breaks even. If you cannot afford to put in the whole amount, then you have to do a calculation of expected tax at retirement vs tax now and try to come up with an estimate for how much you think you'll be earning on taxable amounts once you hit retirement age, how you think the political landscape will line up for taxation, etc...

 

[Garlan Garner]

Well, It appears that Tesla is trying to save the US $7500 tax credit as best they can without losing out on income.

Tesla sent out a massive Model 3 shipment to Canada as some US deliveries get delayed

 

[dgpcolorado]

One caveat with the traditional IRA to Roth IRA conversion: it can raise your tax bracket. I did this in 2011 because my income is much too low to qualify for the federal tax credit. However, doing the conversion put me in a higher tax bracket (10% to 25%) so much of the money I received back as a tax credit was for taxes I never would have owed in the first place if I had spaced out that conversion a little at a time over many years (as I usually do). It is a subtle point, but something to keep in mind if you make a large conversion, as I did: it can be "tax inefficient."

YMMV.