nonrefundable tax credit and payroll withholding

[legoman629]

Hello all, I have been searching for some time and have found little help. I asked an expert here via live chat and they gave conflicting information with this article (found here). So I am going to ask here for a socong opinion. 

Last year I paid about 14,000 in federal taxes (via withholdings on my paychecks) and owed about 500 because of untaxed stock profit throughout the year. This year I am looking at taking advantage of the Residential Clean Energy Credit (5695 part 1). By my estimate, I will be eligible for 18,000 in a nonrefundable tax credit (60,000 x 30% for a geothermal system).

Do nonrefundable tax credits offer a refund of taxes withheld throughout the year? In my above example, I would receive a refund of 14,000 for taxes paid throughout the year and have 3,500 left on the nonrefundable refund that may be rolled over to next year, or does it only apply to the 500 that I owe potentially rolling over 13,500 to the following year?

[RobertB4444]

Non-refundable credits apply only to income taxes due.  Regardless of what you have withheld.  So if your income taxes are 18K then you will use the entire 18K in one year.  In the example you listed above it sounded like your tax bill was 13.5K so you would use 13.5 out of the credit and roll the remaining 4.5 forward into the next year.  

Once your income tax bill is settled then you have any additional taxes that get tacked on.  This includes self-employment tax and extra social security or medicare tax due.  Then that is netted against your withholding and the refund is what remains.

@legoman629 

[legoman629]

Thank you for the reply @RobertB4444, are you saying that I would receive a maximum refund of what taxes I had withheld for the year? I am confused because all of the documentation states that a person cannot increase a refund from a nonrefundable tax credit.

From Turbo Tax "A nonrefundable credit essentially means that the credit can’t be used to increase your tax refund or to create a tax refund when you wouldn’t have already had one."

Since I owed $500 my understanding from the above explanation is that the 14,000 tax credit would only apply to the 500 I owe. 

Are you able to confirm if it only applies to the 500 or if it also applies to withheld taxes? 

Thank you,

[DawnC]

Any withholding over the amount of your tax liability will be refunded.  Maybe this is an easier explanation - Nonrefundable credits can't reduce your tax liability past zero.   Look at your Form 1040, line 18, that is your tax liability.   Your credits reduce this amount.     Your withholding has nothing to do with the tax credit amounts you are allowed to claim.   

And although the solar credit is nonrefundable, it does carry over, so any amount you can't use this year (to reduce your tax to zero) will be carried over to future years.   Enter your geothermal expenses on Form 5695 and then review your Form 1040.    On Form 5695, your solar tax credit you can take this year is on Line 15 and the amount you can carry to next year is on Line 16.  

[legoman629]

Sorry, I am still confused. I looked at form 1040 but that was no help as line 18 includes line 16 which includes 6ish other tax forms to fill out. 

Let me simplify my example and we can exclude all other factors. A person makes 100,000 a year and had 10,000 in federal taxes withheld throughout the year (these are fake numbers and do not rest in reality). 

Come tax season they use Turbo Tax to do their taxes. Prior to entering the solar tax credit Turbo Tax says this person will receive a refund and own zero dollars because their withholdings covered their exact amount of tax liability. 

At this time the person enters the solar tax credit worth 13,000. Would this person then receive a refund of 10,000.

[VolvoGirl · Accepted solution]

Yes.  The non refundable credits go on 1040 line 20.  It can wipe out the amount on line 22 but not to below zero.  Then you can get back all the withholding.  Unless you owe for something else like the 10% early withdrawal penalty or self employment tax.