Question

If I change my W-4 allowances, will it maximize solar tax credit?

Forum|Forum|6 years ago
June 7, 2019
3 replies
0 views

Yearly gross 80k, spouse not working, no other dependants. We're getting solar panels placed on our roof and the tax credit will be around $7500

TurboTax Free Edition Plus Android

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Opus 17

Changing your W-4 will not change the amount of the credit that is paid this year. The limit on the credit is not your tax refund, but your tax liability. Your tax liability is the total amount of tax you owe after considering income, deductions, and other credits. For example, if you had $5000 of withholding and get a $500 refund, your tax liability is $4500. Your liability is still $4500 even if you had $6000 of withholding and get a larger refund, or if you had less withholding and owed a payment. Your tax liability for 2016 is shown on line 63 of form 1040.

If your liability is less than the credit, you will get the credit up to your liability in 2017, with the rest carried over to 2018. So you will get it eventually.

Adjusting your W-4 only changes the timing of when you get your money. If you add allowances, you will get more money in each paycheck and a smaller refund at the end of the year. But it doesn't change the amount of credit you would be able to receive this year.

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vue_sAuthor

So how do I make sure my solar tax credit doesn't go to the garbage can? We got a small check back from the IRS for our 2016 taxes and didn't owe anything. If I won't owe anything again for 2017 and get a refund, then it doesn't make sense for us to buy solar instead of leasing.

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Andernat

Same type of question. My liability is 15k already paid 9k ish and I and getting solar installed later in the year. If adjust my withholding similar to the dependent 2k credit to compensate for the know credit of 18k will IRS refund some of that already paid liability? I usually get a couple hundred back each year in refund but not had to pay at year end for years. Hope that makes sense

Critter-3

As already mentioned in this post ... if you overpay your tax liability with withholdings & credits then you get the excess back ... this is known as an income tax REFUND. The tax return is simply one long math problem ... simply put ...

Total Income - (adjustments + exemptions + deductions ) = taxable income x tax rate = federal Tax liability

Federal Tax liability - nonrefundable credits (like the solar credit) = line 22 on the form 1040

Line 22 + other taxes (like SE taxes) = total tax liability - payments (withholdings & refundable credits) = refund or balance due

What you have withheld from your paycheck is only taken into consideration at the very end of this calculation. You can adjust what you have withheld if you have a non refundable credit come into play however if you do then make sure to adjust it back the next tax year or you will find yourself owing on the next year's return. If I were you I would not change anything and just enjoy the extra large refund on this return.

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rand90210

In 2023, I am installing a solar system that has $4,300 in Federal Investment Tax Credit (ITC). I expect a similar tax situation in 2023 as I had in 2021.

I was recently told in order to claim the full $4,300 credit, my 2023 1040 form must show I have no refund and an underpayment of $4,300 (i.e. I paid less tax than was due by $4,300). This would mean to get the credit, I'd need to adjust my withholdings since I overpaid by $5,000 in 2021 on total federal taxes owed of $36,906.

Based on what I am reading in this discussion the above is incorrect. Basically what I am understanding from this discussion is that in 2023 if I have a federal tax owed of $36,906 and $5,000 refund I'd still get the full $4,300 in Federal Investment Tax Credit (ITC) since my federal taxes owed are more than $4,300. I don't need to worry about adjusting my withholding in order to get the Federal Investment Tax Credit (ITC).

Is my understanding correct?

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NCPERSON1

@rand90210....

look at form 1040, specifically lines 18 and 20.... it's the same line numbers for 2021 and 2022 to use as the example. the solar credit goes on Line 20.

the solar credit you are able to take on your taxes is the lower of Line 18 or Line 20

if Line 20 is lower than Line 18, you can take the whole credit in one year.

if Line 18 is lower than Line 20, the remainder gets carried over to the following year. (you'll see that Line 22 can't be less than zero)

it has nothing to do with your withholdings.

suggest making a copy of your 2021 form 1040 and manually make the adjustments noted above and you'll see what happens to your refund / amount due..... also note nothing in the 'payments' section changes.

your understanding in the last paragraph ("based on what I am reading.....) of your post is accurate!

VolvoGirl

I think it's the "nonrefundable credit" part that's throwing me (and others) - how do we get that credit back? Is it not just via the same mechanisms that we get our overpayment refunds? If it's reducing our overall tax liability (so for me for 2024, that would make my tax liability $6,800), but I still paid $10k+ in 2024, my refund would then be $3,200 (+whatever else I overpaid via my paycheck)?

Yes that's how it works. You will get it back because the tax went down so you get back more of your withholding. If you don't have enough tax to use up the credit then the difference will carryover to the next year's return.

For a Refundable credit, even if it is more than the tax on your return you can actually get the whole amount added on to your refund.

How are you paying the "....paid $10k+ in 2024"? I thought the 10,000 was your tax. Are you sending in estimated quarterly payments?