EV tax credit and hit by the IRS with $20k for no paying penalty and taxes on a 401k

[xandergonzalez]

HI all,

I owe the IRS 20k for an old (2021) 401k I cashed out before 65yo

I paid some taxes on the forms Fidelity sent but IRS told me that is not enough to cover al the taxes and penalties.

My tax advisor told me that if I get an EV with a $7.5k EV tax credit, I can use that credit and reduce what I owe to the IRS more than 1/3rd. Is this true? I cashed out the 401k on 2021 but i will purchasing the EV vehicle (that qualifies for the credit) in 2023.

If someone knows, please let me know

Thanks all!

[AmeliesUncle]

The EV tax credit only affects your current year tax return.

Depending on your situation, that MIGHT give you current year refund, which would be applied to your past debt.  On the other hand, it is possible the EV credit would not affect your current year tax return at all. 

Without knowing all of the details of your current year tax return, it is impossible to tell you how it would affect things.  But if your tax advisor knows what he is talking about and knows the specific details of your current year tax return, as I said, the EV credit hypothetically could increase your current year refund, which would be applied to your past debt.

[VolvoGirl]

What happened?  Did you enter the 1099R for the 401K into your tax return?  If you were under 59 1/2 there is also a 10% early withdrawal penalty on it.  

[Mike9241]

The EV credit can only be claim in the year you put the EV into service (2023). any EV credit in excess of your tax liability for that tax year (2023) would be lost since there is no carryback or carryforward. Besides for that amount of EV credit you probably would be spending $30K or more for the vehicle which the IRS could seize if you fail to pay your past tax liability. What your tax advisor is saying by getting the EV credit you lower your 2023 tax liability and that tax money you save (could be much less than $7500 because the benefit of the credit depends on your tax liability.  if it's only $4K before the credit - certain taxes and credits can affect the tax liability to which the credit can be applied - the credit will only save you the $4K - for example the credit can't be used to offset self-employment taxes) can go to pay off your 2021 balance. if you need a new vehicle and have the money to shell out for it maybe it makes sense.  personally if i had the money and didn't desperately need a new vehicle i would pay of the IRS because penalties and interest are continuing to accrue

[NCperson]

@xandergonzalez  the advisor is incorrect because the EV tax credit is a 'non-refundable credit'.  It can only reduce your current year tax liability; it does not otherwise put cash in your pocket.  You can not get 'blood out of a stone'. 

Your current year tax liability is Line 22.  the EV credit can reduce line 22 to zero and that is all.  If the tax liaiblity prior to applying the EV credit is less than $7500, the rest is lost.  

is the advisor confusing 'tax liability' (line 22) with the amount you owe (line 37)? 

[xandergonzalez]

Thank you for your answer,

I found online(from evlife) a case like mine:

(For example, if you buy a Tesla Model Y with a $7500 tax credit in 2023, but you only owe the federal government $3000 in taxes in 2019, the maximum credit you can use is $3000.)

In my case it is 20k and not 3k from the example, so I am assuming that the $7.5k will allow to cover some of the 20k debt?

I do not know, I just do not want to buy an EV and the credit won't apply to my debt.

[xandergonzalez]

Thanks for the reply,

I found this online (evlife).

Once you’ve determined the EV tax credit for your make and model, the next step is to determine your tax liability.  This credit applies to taxes owed in the year you buy your vehicle, so your federal tax bill will determine the maximum amount you can get back as a tax refund.  (For example, if you buy a tesla model Y with a $7500 tax credit in 2023, but you only owe the federal government $3000 in taxes in 2019, the maximum credit you can use is $3000.

It is very confusing. :(

[NCperson · Accepted solution]

@xandergonzalez what you state is not true.  As I stated, the EV credit is "non-refundable'. 

That means if your CURRENT YEAR liability is $3,000 (and you can see that on Line 22 prior to applying the EV CREDIT), then the maximum EV Credit is $3,000.  That $3,000 is then applied to your tax liability which becomes zero.  The remaining $4500 is lost for ever. 

if you owe the IRS $3,000 for the 2019 tax year and you buy a EV in 2023 and let's say your tax liability is zero (Line 22), then you still owe the IRS $3,000 and there is no benefit to the EV credit.

Do not confuse the tax liability on Line 22 with the Amount Due on Line 37 - they are very, very different. 

[xandergonzalez]

Thanks so much for the clarification!!!