Can I use the 7500 EV credit offset against my 401k withdrawal tax withholding?

[SeniorEv]

Hello,

I am a retired senior with no other income besides my SS. If I withdraw $38000 from my 401k to buy an EV, I believe I will have a tax withholding of over 7500 for federal. Under this circumstance, will I get a refund on that 7600 withholding? 

[VolvoGirl]

It's not whether you get a refund or tax due.   And the withholding doesn't matter.  It's if you have a tax liability on your income.  Look at your 1040 line 22 for total tax. So as long as Line 22 is more than $7500 (before applying the credit), you'll get the whole credit back. 

[VolvoGirl]

If you can wait they are having a special Ask a Expert day for EV credit on Wed June 28.

https://ttlc.intuit.com/community/events/tax-law-changes-energy-ev-credit-ask-the-experts/ev-p/30706... 

[SeniorEv]

for 2022, I paid very little federal taxes as SS was my only income and didn't go beyond the standard deduction. That's why I want to know if I withdraw the money from my 401k this year, I will have 7600 in my federal tax liability if I do not pay the withholding at the time of withdrawal and I want to offset it against that 7500. Thus I would only pay 100 dollars in tax due?

[VolvoGirl]

No.  Withholding doesn't matter.  It's based on the tax on the income which is the gross amount of the 401K withdrawal.  And it may make some of your SS taxable.  Are you married or single?

Up to 85% of Social Security becomes taxable when all your other income plus 1/2 your social security, reaches:

Married Filing Jointly: $32,000

Single or head of household: $25,000

Married Filing Separately: 0

If you are Single your income will be 38,000+maybe half of SS

then minus the Standard Deduction of 15,700

gives you the taxable income

I don't know your SS and I don't know what the tax will be on your income.  But the EV credit will only reduce the tax to zero.  If it does reduce it to zero you will get all your withholding back.  

[SeniorEv]

I am single, in 2022 I only had 21000 from SS benefits and 5000 from giving daycare. I think for 2023 will be a similar situation for me. If I withdraw the money from my 401k without paying the withholding first and pay during my 2023 tax return. I believe I will have a tax liability north of 7500 so I will be able to take the whole ev credit.

[VolvoGirl]

Well based on 2022 your tax might be about 4,500.  So the 7,500 credit will wipe that out.  But if you have day care self employment income you will still owe the self employment tax on it.  The credit won't apply to that.  

You pay Self Employment tax (Scheduled SE) on a Net Profit of $400 or more on Schedule C.  You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400).  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare. 

Are you thinking the tax will be 7600?  That is a fixed 20% just for withholding.  That's not the actual tax on all your income.  Your tax may be less.  

[dmertz]

It's possible that in 2022 you had Earned Income Credit that applied against your self-employment tax, leaving you with no tax liability or even a small refund for 2022.  The $38,000 taxable distribution from the 401(k) will increase your AGI and make you ineligible for the EIC, so you'll end up paying the self-employment tax due to the loss of the EIC.

Under your circumstances, you should probably be doing some serious tax planning each year.  With only the addition of the $38,000 taxable 401(k) distribution, your 2023 income tax liability on line 22 will still be less than the $7,500 EV credit, so it would likely make sense to increase your taxable income even further by making some amount of Roth conversion from your 401(k), maybe somewhere near $24,000, so that you take advantage of the entire $7,500 credit.  Even in future years, it seems that some amount of Roth conversion each year, maybe around $10,000, would make sense to bring your AGI up to the amount of the standard deduction.  Doing so will reduce future tax liability, particularly when you reach age 73 and you must begin receiving RMDs from the 401(k).  (I'm assuming that your RMDs or any other future income will be large enough that they will bring your AGI above the standard deduction at some point.  Still, even if your AGI will never be high enough to create a tax liability, the Roth conversions you do might benefit your heirs by reducing Income in Respect of a Decedent that they would have to include in their income.)