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

[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?

[NCperson]

@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! 

[question110]

So if my federal tax total/I owe $10,000 in taxes for 2024, and I have a $3,200 tax credit from solar installed in 2024, I will get the $3,200 back effectively as a refund when I file my 2024 taxes, even though I usually also receive a ~$100 refund (from overpayment) when I file? The fact that I've already paid my tax doesn't matter, I'll get the credit/refund for the $3,200 as long as my federal tax total that I owe is more than that?

I've been told that I have to adjust my withholdings to be able to get the tax credit from the solar installer (and turbo tax answers like this one: https://ttlc.intuit.com/community/after-you-file/discussion/full-solar-tax-cr[product key removed]ed...), but from this thread that doesn't appear to be correct.

[VolvoGirl]

Yes.  The credit will reduce the tax on your return so you will get back more refund.   So if your tax on line 22 is 10,000 and you have a 3,200 credit the tax will be $6,800.  Then you will get more of your withholding back.  

Don't change your withholding. It's not whether you get a refund or a tax due. And the withholding and estimated payments 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 the credit, you'll get the whole credit.

The Solar Credit is a nonrefundable credit. It goes on Schedule 3 line 5a which goes to 1040 line 20. It can only reduce the tax liability on 1040 line 22 to zero. The rest will carryover to next year.  Then you will get back all your withholding and any refundable credits. But it doesn't reduce any other taxes on line 23 like self employment tax or a 10% early withdrawal penalty on IRAs.

[question110]

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)?

[VolvoGirl]

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?