Federal Tax credit used to pay taxes on and inherited IRA

[mhffas]

I inherited an traditional IRA ( NOT Roth IRA) from my mother and I know I have to withdraw those funds over 10 years.   I am about to receive a historical tax credit for renovating a historical building.  If I have part of that credit not used this year can I use that credit to pay the taxes that I will owe for taking the required distribution from that inherited IRA?

If that credit is large enough, can I  empty that IRA completely, and use that historical federal tax credit to offset all of the federal taxes that I would owe on the funds that I withdraw.   Basically, I won't have to pay any federal taxes?

 I would take all the funds out, pay no taxes and create a new investment account with those same funds.

Thanks

[Opus 17]

You have a federal credit for historical preservation, or a state credit?  Which federal form?

The taxes on an IRA are regular income taxes, and are computed on line 16 of form 1040.  Most credits are reported on schedule 3, which are applied against your tax on line 17 and line 20, with your final income tax on line 22.   Then certain additional taxes are added, like self-employment tax and penalties for excess contributions or early withdrawals from IRAs and other things.

As long as your credit is on schedule 3 and comes off your income tax before line 22, it can offset the income tax from an IRA withdrawal.  But credits can't offset penalties or self-employment tax. 

If this is a state program, you will pay whatever federal tax you owe for the withdrawal, and if you get a large state refund, that will offset the damage in your bank account but not directly on the tax return. 

[mhffas]

Thank you for your reply.

I will have a 20% federal tax credit for the cost of the project and a 20% state tax credit for the cost of the project.   Project will be 500 K so I will get 200K credits.

My timeline is to  finish the design of the project in a month or so.  After the design is completed and I have price quote from my contractor for the project, I will give this information to a group that specifies in applying for these credits. 

There are three steps to receive the tax credits. The first step is submission for approval before the project starts, the second step is an update submission when the project is 50% completed, and the final step is showing the project has been completed, and  then receiving the credits.   I anticipate the project being completed in 2026.

I can also sell the Louisiana tax credits for 88 cents on the dollar.

Thanks again for your insight and knowledge.

[Opus 17]

@mhffas 

That doesn't really tell me what you need to know.  You should get the various forms and instructions and see where the credits come out on your tax return.

If you are talking about this credit,

https://www.irs.gov/businesses/small-businesses-self-employed/rehabilitation-credit

that's available for small businesses.  So it will reduce the tax you owe on your business, but that may or may not flow to your personal tax return to be able to offset an IRA.  It depends on how you file your business taxes.  And if you have a loss on your business (because the credit offsets your tax plus more), then does the loss carry over to your personal return or does it stay with the business.  

Also, this rehab credit seems like it is spread out over 5 years, not taken all at once.  So you may need to spread out your IRA withdrawals, assuming the business credit can offset your personal income tax, which it may not.

You should be speaking with a tax pro who knows about your business taxes and how the business credit will interact with your personal return.