IRA withdrawal to buy an electric vehicle?

[rickspfc75]

If I withdrawal $12,000 from my traditional IRA my additional tax burden will be $4,000 on top of the $7,000 I already pay from my paycheck. If I buy a EV the tax credit will be $7,500. This additional $4,000 tax would be washed out by my tax credit. Am I right or there is something else I should be aware of it? Thanks in advance.

[Critter]

The EV credit is applied $ for $ against any federal income tax owed on the return ... if not used up totally the excess is lost. 

[rickspfc75]

Please forgive my follow up question as it may be a stupid one. If I have already paid the taxes through Payroll deduction and or IRA withholding in 2019 and the total paid is over $7500 would I get a refund? Thanks in advance.  

[dmertz]

Tax withholding, estimated tax payments and any amount paid with a request for filing extension are applied as credits on your tax return.  If these total more than the tax liability calculated on your tax return, you get a refund.  That's was a tax return is for, to reconcile the total amount sent to the IRS against the tax liability determined on your tax return.

Tax credits such as the EV tax credit are only applied against income taxes, not any IRA early-distribution penalties or any other taxes that are not income taxes.

[rickspfc75]

The early distribution would be considered Income? The penalty would not? Can any of the additional IRA withdrawal tax burden be offset by the EV tax credit? Thank you.

[VolvoGirl]

Basically, You enter all your income.  Then get to subtract the Standard Deduction or your Itemized Deductions to arrive at the Taxable Income.  The tax is calculated.

The credit can reduce the tax, but only to zero.  If the credit is more than the tax you don't get the excess back.

THEN the withholding is subtracted from any tax you still owe so if the credit reduced your tax to zero you would get back all the withholding.

Just saw your last post.  You will report the full gross IRA withdrawal (before taxes and penalty taken out) as income.  Here's my note on that.

You don't actually pay the tax or 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½).  You had taxes withheld like from your paycheck. You still have to enter the whole gross original amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The gross amount shows up,on 1040 line 4a and the taxable amount on 4b.  The withholding will show up on 1040 line 16.

It has to break out and show the 10% penalty separately on your return, (Schedule 4 line 59 which goes to 1040 line 14)

Then you get credit for all the withholding taken out on 1040 line 16.

[rickspfc75]

My bracket is 22%. If I take an early distribution on my IRA of $12,000 I will pay an additional $3,884 in taxes. $2,884 in Income Taxes and $1,200 penalty. This additional Income tax was not withheld on my paycheck. I would technically have to send the IRS the money. Would I be able to offset this bill with the EV credit, or the credit can only be offset by withheld money? Thanks for your help. I just want clarify.

[Anonymous]

if not a qualified ROTH IRA distribution and if you are under 59 1/2 you have incurred a $1,200 early withdrawal penalty that can not be offset by the EV credit.        not all vehicles have the maximum $7,500 credit

[VolvoGirl]

The IRA plan should take out withholding on the distribution like withholding from paychecks.  You can tell them what percentage you want taken out to cover the tax and penalty.  If you want to get a certain amount distribution you can take out more gross so when you subtract the withholding it nets out to what you want.

[dmertz]

The question was about a traditional IRA distribution, not a Roth IRA distribution.  An early IRA distribution is one made before age 59½ and is subject to both income tax and to a 10% early-distribution penalty.  The 10% penalty is an excise tax, not an income tax.  The EV tax credit does not reduce liability for excise taxes, only income taxes. 

In your example, the income is falling in the 24% tax bracket, not in the 22% tax bracket.  The $2884 of tax liability from the $12,000 distribution adds to your overall income tax liability and the EV tax credit is subtracted from that overall income tax liability but cannot be used to reduce your income tax liability below zero.  The $1,200 penalty is added to that result to determine your overall tax liability (income tax plus excise tax).