Federal tax credit only provides credit against tax liability?

[Davedough]

Thanks for catching my error there -- it's the 24% tax bracket, not 25%. Used to be 25% but I keep forgetting that changed to 24%.

Sounds like you have a handle on it. It's always a shame to burn 10% on penalty, and usually that should be avoided. But if you're in a position that those are really your only to options (losing some of the $7500 tax credit vs paying 10% in penalty), then it's worth paying the penalty since 24% savings is > 10% penalty.

But there may be other options that are even better, such as the rollover to a Roth as suggested above. Depends a lot on your cashflow situation though. If not having that $15k down payment means financing $15k more, you're paying interest on that over years, which could add up to close to (or more) than the 10% penalty (depending on your loan interest rate). Similarly, it also depends on how much income you expect to make off of leaving that $15k in an investment account.

Lots of "what ifs". But sometimes simplicity is worth the trade-off, and offers more peace-of-mind. It's pretty simple to withdraw just enough from the IRA to make sure you can use the full $7500 tax credit. I probably wouldn't withdrawal any more though, unless you're getting a really crappy loan interest rate that makes that worth paying 10% penalty too.

Also remember an IRA wthdrawal boosts your tax income taxes too, if you're in a state that has them. So factor that in too.

Thank you, this gives me a lot to think about. Cash flow wise, I’m lucky to be in a situation where my family is comfortable. Financing the 15k and not taking it off the loan is totally an option. My credit is good so I am sure I’ll get the 1.9@60 rate, it’s just a matter of not WANTING to pay that big of a monthly payment. I was just brainstorming ways to use my fun money to my advantage since I didn’t really do anything for that money in the first place but occupy a butt in a seat for 4 years

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[BDC]

Thank you for this. This clears up a bit for me. I know about the 10%, I’m 46 years old so that would definitely apply and it looks like with my and my wife’s income, we’re in 24%. When we do our taxes this year I’ll have to note our current liability to then plan for next year. Ultimately I’m trying to use that “free money” to make a hefty down payment so I can reduce my monthly payment on the vehicle overall.

I am not sure how someone could be in the 24% tax bracket and still not have $7500 in taxes. Let's say you are single (which doesn't sound true, but trying to get the lowest number), that means at least $85K in income. If you paid on average of just 10% of that (which is *way* too low), you already owe $8500. Unless you are figuring before all deductions, but even then it seems you would have enough in taxes. Taking the $12,400 single deduction from $85K puts you at $72,600, which even at 10% is practically $7500 (and you would owe more than 10%). So I guess I am not sure why you need to play any games with an IRA, and definitely does not seem to make sense losing $1500 or so in fines for early withdrawal.

Caveat: I am not a tax professional, these are just idle comments and speculation. You should consult a tax professional for advice on these issues.

 

[ARK]

I would just add one thing to this discussion, sometimes I have seen brokerages withhold tax from early IRA withdrawals in the same way your employer would withhold a portion of your check for taxes.

If someone is going this route, I would clarify with the brokerage if they do this, so that if you are planning on a, e.g., $10,000 withdrawal, you actually end up with that much cash in your bank account to use for your down payment, as opposed to some lesser amount because of withholding.

 

[llinthicum1]

Again, I would add be sure to get with your Financial Advisor and Tax Advisor. IRAs are meant for retirement.

 

[dbsb3233]

I am not sure how someone could be in the 24% tax bracket and still not have $7500 in taxes.

Yeah that would be unusual. Maybe he really meant the 22% bracket, which is still high enough for the same logic to apply.

 

[EyeOnMachE]

As others have mentioned tapping into your Roth IRA has some advantages BUT there are certainly other factors to consider beyond being 59 1/2, or paying the 10% penalty, such as the 5 year rule. Without getting into the specifics I'd recommend reading this recently posted article by Business Insider: "Understanding Roth IRA withdrawal rules helps you avoid taking money too soon, triggering taxes and penalties"

In addition to generating a tax liability of at least $7500 to take full advantage of the EV federal tax credit, things become more complicated for those that purchase health insurance on the open market (e.g. ACA - Obamacare), such as those who are retired (no or low earned income) but not 65 yet to be Medicare eligible. To get the most federal medical insurance premium (which is basically a federal tax credit) your MAGI needs to below ~$20k. In other words, the higher your MAGI the less federal premium subsidy you can receive. For a single filer the subsidy phases out at around a $51k MAGI. (Here's a good article for reference: "How Is Income Calculated for Health Insurance Subsidy Eligibility?")

So basically to get the $7500 EV federal tax credit you need to have at a $7500 tax liability which typically means having a high enough AGI. But the higher your AGI, the higher your MAGI will be, which in turn then reduces, possibly eliminating, your federal insurance premium subsidy you can receive. And vice versa. So unless someone has a strategy to get the most out of both federal tax credits, you need to run the numbers to figure out which one will yield you a higher tax credit.

 

[Davedough]

I am not sure how someone could be in the 24% tax bracket and still not have $7500 in taxes. Let's say you are single (which doesn't sound true, but trying to get the lowest number), that means at least $85K in income. If you paid on average of just 10% of that (which is *way* too low), you already owe $8500. Unless you are figuring before all deductions, but even then it seems you would have enough in taxes. Taking the $12,400 single deduction from $85K puts you at $72,600, which even at 10% is practically $7500 (and you would owe more than 10%). So I guess I am not sure why you need to play any games with an IRA, and definitely does not seem to make sense losing $1500 or so in fines for early withdrawal.

Caveat: I am not a tax professional, these are just idle comments and speculation. You should consult a tax professional for advice on these issues.

I understand that and I’m not worried about qualifying for the tax credit. I’m fairly certain I will. I’m lucky enough to make a very good living for myself.

Again, the situation is like this. I was managing my 401k and noticed an old stale account from 20 years ago. When I managed to get into it, I saw an old employer contribution for 15k. I had no idea it even existed until 6 months ago. It’s not money I planned on. I honestly don’t care much what happens to it which is why I’ve been playing with it on some penny stocks. It’s not money I invested originally so it’s in a sense free to me. I was just trying to figure out how I could use it to drive the price down of my $65k GT. I understand it will be penalized. I was trying to figure out if the tax credit for buying an EV would equal the penalties I would receive for an early withdrawal, thereby allowing me to put a down payment with money I was never counting on in the first place. My 401k and other retirement funds are fine and will be safe. This is just some old account I play around with.

 

[dbsb3233]

Again, I would add be sure to get with your Financial Advisor and Tax Advisor. IRAs are meant for retirement.

Sure, if they have one, that's a given. But not everyone pays a financial advisor or tax accountant. I don't, unless it's something really complicated. But I do use TurboTax when filing because it makes filling everything into the proper forms easier.

I prefer to research my own financial issues so I understand them better. Most of it is not that difficult if one is inclined toward that type of thing (as I am). But of course that has it limits. Some things simply require the hiring of a professional. But I always bristle a bit the rote "always hire a professional for every financial issue" footnote. Some people need to, others don't.

 

[zvez]

I have question about the $7,500 Federal Tax Credit that customers receive if they purchase a Mach-e. If the customer's Federal tax liability is less than the $7,500, do they still receive the full $7,500 or do they receive the tax credit equal to their tax liability. Just curious if the tax credit is $7,500 or up to $7,500. Also, I'm guessing that the tax credit is received when the customer files their taxes, not at the time of purchase.

I'm retired so a lower tax liability, one option for me, is to take extra $$ for down payment out of 401k/ira which will increase tax liability for that year

 

[malba2366]

Thanks. Potential buyers; e.g., retirees who don't have earned income, their tax liability is much lower than the $7500, so customers will have to factor that in.

Market is at all time highs. Sell enough stocks in a taxable account to create enough earnings to create a $7500 tax bill then rebuy the stock (I think you have to wait 30 days to avoid wash trading) if you don’t need the money right now.

 

[phidauex]

One suggestion since it is now tax season - ask your tax preparer to run a "what if" on your 2020 taxes, pretending you bought the car in 2020, and see if you would have been able to take advantage of the full credit.

You can do this yourself in your tax software too, just save your (correct) return, go in and add the EV credit, and see what happens to your refund. It should go up by $7500. If it doesn't, then you could play with some other 2020 scenarios, for instance, a stock sale or a distribution as people described. Assuming your 2021 looks similar to your 2020, it should give you a good idea of what kind of hoop jumping, if any, you'd need to do to take full advantage of the credit.

 

[dbsb3233]

One suggestion since it is now tax season - ask your tax preparer to run a "what if" on your 2020 taxes, pretending you bought the car in 2020, and see if you would have been able to take advantage of the full credit.

You can do this yourself in your tax software too, just save your (correct) return, go in and add the EV credit, and see what happens to your refund. It should go up by $7500. If it doesn't, then you could play with some other 2020 scenarios, for instance, a stock sale or a distribution as people described. Assuming your 2021 looks similar to your 2020, it should give you a good idea of what kind of hoop jumping, if any, you'd need to do to take full advantage of the credit.

Or simply look at your TOTAL TAX (Line 16, I believe). That's your total tax liability, before any withholding or payments.

 

[phidauex]

Or simply look at your TOTAL TAX (Line 16, I believe). That's your total tax liability, before any withholding or payments.

I GUESS, if you want it to be EASY... I suppose my suggestion of playing with scenarios probably only makes sense if your total tax is less than $7500 and you want to compare workarounds.

 

[Orangefirefish]

Thank you, this gives me a lot to think about. Cash flow wise, I’m lucky to be in a situation where my family is comfortable. Financing the 15k and not taking it off the loan is totally an option. My credit is good so I am sure I’ll get the 1.9@60 rate, it’s just a matter of not WANTING to pay that big of a monthly payment. I was just brainstorming ways to use my fun money to my advantage since I didn’t really do anything for that money in the first place but occupy a butt in a seat for 4 years

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I understand that and I’m not worried about qualifying for the tax credit. I’m fairly certain I will. I’m lucky enough to make a very good living for myself.

Again, the situation is like this. I was managing my 401k and noticed an old stale account from 20 years ago. When I managed to get into it, I saw an old employer contribution for 15k. I had no idea it even existed until 6 months ago. It’s not money I planned on. I honestly don’t care much what happens to it which is why I’ve been playing with it on some penny stocks. It’s not money I invested originally so it’s in a sense free to me. I was just trying to figure out how I could use it to drive the price down of my $65k GT. I understand it will be penalized. I was trying to figure out if the tax credit for buying an EV would equal the penalties I would receive for an early withdrawal, thereby allowing me to put a down payment with money I was never counting on in the first place. My 401k and other retirement funds are fine and will be safe. This is just some old account I play around with.

I see, I was confused previously on how you could be in that high of a tax bracket and not qualify for it (4-5 kids, I was wondering). If you qualify for the tax credit in full already, personally I'd let keep the money where it is and let it ride. Money's cheap now, and there's no point paying the penalty now on top of forgoing whatever investment returns you could be getting, also if you take the money out now of that tax umbrella, there's no easy way for you to get it back in, unless you don't max your contributions out annually already.

 

[Mickey the T]

I understand that and I’m not worried about qualifying for the tax credit. I’m fairly certain I will. I’m lucky enough to make a very good living for myself.

Again, the situation is like this. I was managing my 401k and noticed an old stale account from 20 years ago. When I managed to get into it, I saw an old employer contribution for 15k. I had no idea it even existed until 6 months ago. It’s not money I planned on. I honestly don’t care much what happens to it which is why I’ve been playing with it on some penny stocks. It’s not money I invested originally so it’s in a sense free to me. I was just trying to figure out how I could use it to drive the price down of my $65k GT. I understand it will be penalized. I was trying to figure out if the tax credit for buying an EV would equal the penalties I would receive for an early withdrawal, thereby allowing me to put a down payment with money I was never counting on in the first place. My 401k and other retirement funds are fine and will be safe. This is just some old account I play around with.

So you're in the 24% tax bracket. We add the 10% tax early withdrawal penalty to get 34% and while I'm not sure about Virginia taxes, let's call it 6% to get a nice round 40%. So on a $15K withdrawal, you'll pay $6,000 in taxes. Using $15K to drive down the price of you car, only drives it down $9K, which is very in-efficient. (I'd certainly be surprised if you could save that much in interest with the larger downpayment.) OTOH, if you took $15K out of a regular savings account--assuming you have one--you'll get the full benefit of the $15K.

The $7500 tax credit doesn't come into play here. If you're in the 24% tax bracket, you're paying a minimum of $30K/year in federal taxes, so you'll get the $7500 tax credit whether you touch your IRA or not.

Lastly, you're giving up tax-deferred money. That IRA has the potential to grow faster than a normal account due to the tax deference. (Well, maybe not if you're investing in penny stocks.) And it doesn't have to remain an orphaned account--in all likelihood you can roll it over into your existing 401(k). Sorry for the unsolicited advice, but I'm hoping to help you buy many more $65K cars over your lifetime.

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