Can I use the tax owed from an IRA withdrawl towards the Solar Panel credit?

[dmertz · Accepted solution]

Residential Energy Credits can be applied to reduce your income taxes resulting from an IRA distribution, but cannot be applied to reduce any early-distribution penalty on an IRA distribution.

[pompcj]

No there would be no penalty involved.  We do not have enough federal tax to offset the Credit unless we take a large hunk out of both of our IRA's.

[dmertz]

Instead of taking money out of the IRAs, you can perform Roth conversions to incur the tax liability to which to apply the tax credit but keep the money in a retirement account.  Since you are over age 59½, you can take the converted amount (and any original contributions you may have made) from the Roth IRAs at any time tax and penalty free.  Distributions of any earnings on the investments while the money is in the Roth IRAs will also be tax free after 5 years from the beginning of the year for which you each first make a Roth IRA contribution or conversion.

[pompcj]

Thank you that helps greatly.  Would it be best to have my taxes done so we will see how much we have to convert to a Roth or just convert some now?

[dmertz]

If your goal is to create an income tax liability that equals (or at least comes close to) your otherwise unused credits, it's best to prepare at least an estimated tax return.  That can be a bit tricky to do before year end, but it doesn't *have* to be done by year end.  You must make the distributions from the traditional IRAs by December 31, 2017 for the income to be taxable on your 2017 tax return, but you have 60 days to complete a Roth conversion or a rollover of the distribution.  You could potentially take distributions from the traditional IRAs a bit in excess of the amount that you need to convert, complete your actual tax return to determine the optimal amount to convert, complete the conversion of the optimal amount, then roll the remainder back into the traditional IRA, all before the end of the 60-day window.  This is a bit riskier than just doing the conversions outright because you can potentially get tripped up by the one-rollover-per-12-months rule (per individual) on the rollover of the remainder back to the traditional IRAs.

[SweetieJean]

"No there would be no penalty involved."  So you are over age 59.5?  Are you taking a Required Minimum Distribution?

[dmertz]

Good point, any RMD for an IRA must be satisfied before any other, additional amounts are converted to Roth.  Age is otherwise not a factor when doing a Roth conversion.  An RMD cannot be converted to Roth.

Don't forget about any state income taxes that might be due on an IRA distribution or Roth conversion.

[pompcj]

Yes and I just moved to a state that has income tax, bummer.

[pompcj]

Yes and I just moved to a state that has income tax, bummer.

[pompcj]

SweetieJean  no we are not at a point where we have to take out of our IRA's.  We are 64 and 67.

[SweetieJean]

Is the 67 year old getting Medicare?  Be aware that any large increase in your income can raise your Medicare premiums 2 years down the road.
<a rel="nofollow" target="_blank" href="https://www.ssa.gov/pubs/EN-05-10536.pdf">https://www.ssa.gov/pubs/EN-05-10536.pdf</a>

[pompcj]

Even if we roll it into a Roth but just used to Federal Tax to offset our Solar credit?

[SweetieJean]

Yes, because doing the Roth conversion is taxable.

[dmertz]

Yes, Medicare IRMAA is based on AGI.