Making sure you qualify for the Tax Credit

Shooting this off my to my Tax guy now.....

Mike

 

That's a bit simplistic, but worth a look.
--The Prime federal income tax credit is $4502, based on the battery size.
--Pull out last year's form 1040. Use this to estimate what your 2018 tax will be.
--On that 2017 1040, look at line 47. That's the total tax you owed. If it's less than $4502, you may benefit from fiddling with taxable income for this year.
--Look at line 55--credits you receive for other things. Line 56--tax after the line 55 credits. Line 54--this is where the electric car credit goes.

We're talking about total income tax here, not just the tax you may owe after the withholding from your pay check or your periodic payments. If you can juggle some taxable income into 2018 to take advantage of the credit without upsetting more important financial goals, OK. Do not let the tax tail wag the dog--keep your overall financial planning always in first place.

 

But don't convert the whole account. Just convert only as much or little as needed to raise the desired amount of additional tax. Converting a whole big account in a single year can create a tax disaster by pushing you into an undesirably high tax bracket.

New as of January this year, Roth conversions are no longer reversible. In the past, if a taxpayer converted too much at once, there was a time window to undo all or part of it. But that 'Undo' button is now ancient history.

 

Yes of course you can withdraw IRA to Roth or simply just to cash in your hands...either way works, as well as other ways such as taking profits in Tesla stock (not me) or taking possibly taking more scoial securty (for next year). It gets complex as you have to sort out best options, considering Fed and state taxes. But sure, shake your brain to see how to take advantage.

The other thing I noticed Ca apparently giving free HOV to lower income folks, even if the vehicle is disqualified due to previously having tags (not sure if that is BEV-only), and higher state tax credits...

 

This doesn't work for younger folks, under age 59.5. They must pay an extra 10% penalty, on top of the income taxes due. This could easily wipe out the desired tax credit.

"If you withdraw money from your individual retirement account before age 59 1/2, you will generally have to pay a 10 percent early withdrawal penalty in addition to income tax on the amount withdrawn. This means a $5,000 withdrawal taken by a mid-career worker in the 25 percent tax bracket would result in $1,750 in taxes and penalties."
https://money.usnews.com/money/retirement/articles/2013/09/23/11-ways-to-avoid-the-ira-early-withdrawal-penalty

There are valid reasons to withdraw early without paying this penalty, but buying a plug-in car is not one of them.

Semantically, 'withdraw IRA to Roth' is a confusing and potentially mislead phrase. 'Roth conversion' is better.

 

...but yes it works for younger folks, right? You can pay the penalty too! Have your cake and eat it too. right?

 

The withdraw-for-cash-on-hand path doesn't work for the younger folks, the IRS confiscates too much of the cake.

Younger folks can do a Roth conversion, but it puts no money in their hands.

 

Saw an article where the Koch Bros are working hard to have the tax credit for electric cars eliminated. So get it in soon. May not be available down the road.