Solar Tax Credit

[dmoe54]

I have no taxable income.  I do have investments with Schwab.  I usually pay my tax when I withdraw my RMD.  If If I don't pay the tax, will my Solar Tax Credit be used? 

[jtax]

Hi @dmoe54, the solar tax credit is "non-refundable." That means if you have no tax liability, the credit, unfortunately, does you no good. Only a small number of tax credits are refundable, and the solar credit is not one of them. The Solar Tax credit can only reduce tax that you owe.

However, could you clarify your situation? I am not understanding it all. You say you have no taxable income but that you take an RMD (from an IRA or employer retirement plan) and pay tax. Why would you pay tax if you have no taxable income? 

Do you mean that you have tax withheld from the RMD distribution? Or that you pay an estimated tax payment when you get the cash? In either case, the Solar Tax credit is not affected because the non-refundable nature of the credit is not all about tax that you paid, but rather your tax liability. Tax withheld (or paid on a 1040-ES) is just an estimate of your taxes. It might be high or low. You might get a refund or you might owe tax when you file your 1040.

The bottom line, though, is that if you have no taxable income, you won't have any tax liability to reduce by the solar tax credit. Sorry.

[Opus 17 · Accepted solution]

Your tax liability is the amount the IRS keeps at the end of it all.  For example, if you paid $5000 by withholding or as a payment, and get a $500 refund, your liability was $4500.  This is line 22 of your form 1040.  The solar credit can not be used to go against self-employment tax or penalties.

If you buy and sell securities, I assume you owe at least some capital gains tax, which is calculated on schedule D and then flows to form 1040 where it will show up on line 22 after any other taxes or credits.  If you have tax on line 22, that can be reduced by the solar panel credit.  Any leftover credit would be carried forward to next year.

Having a large solar tax credit would give you an opportunity to do some tax planning, such as selling stocks with large capital gains, to lock in the gains and pay no tax (by using the credit).  Just be careful that you avoid the wash sale rule (don't buy back the same or similar investment for at least 31 days). 

[jtax]

@Opus 17, excellent suggestion on tax planning and selling some appreciated securities.

Just to be clear, there is no need to wait 31 days to repurchase sold securities if the sale results in a gain. The wash sale rule of I.R.C. 1091 only applies if a loss is recognized. It also disallows the loss if the "substantially identical" security was purchased 30 days before the sale that generated the loss.

[dmoe54]

I am retired with SS and a small pension.  Schwab takes out the tax on my RMD.  My understanding (from the forum) is that if I don't allow Schwab to deduct the tax, TurboTax will use my solar credit to pay it.  If I owe more taxes, I will pay the additional tax when I submit my tax refund.  Do I have that correct?

[SteamTrain · Accepted solution]

@dmoe54 

If you have solar credits to use, then the tax software will use that credit to reduce or eliminate your calculated tax liability....irrespective of whether or not you have tax withheld when your pension is distributed.   The tax liability is the tax calculated before considering any tax  prepayments you might have made thru withholding or paid-in quarterly estimates.

ie.  the tax credit is applied the calculated tax BEFORE your withholding is considered.  Thus:

1) if your Solar credit eliminates the calculated tax, then you get any withholding back as a refund. 

2)  IF you have no withholding, and the solar credit eliminates the calculated tax, then you don't owe, nor get any refund...and any excess credit is just carried over to be used next year.

3) I you have no withholding, and the calculated tax is not eliminated by the solar credit, then you may owe some taxes when you file.

[Opus 17]

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@dmoe54 wrote:

I am retired with SS and a small pension.  Schwab takes out the tax on my RMD.  My understanding (from the forum) is that if I don't allow Schwab to deduct the tax, TurboTax will use my solar credit to pay it.  If I owe more taxes, I will pay the additional tax when I submit my tax refund.  Do I have that correct?

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Withholding does not change your tax liability.  Tax liability is what you actually owe to the IRS, what they keep at the bottom line.

Suppose your combined tax liability on your pension, social security and IRA is $3000.  If Schwab withholds $3000, that covers your taxes, but your liability to the IRS is still $3000.  Suppose Schwab withheld $4000--your liability is still $3000 and you get a $1000 refund.  Suppose Schwab withholds northing--your liability is still $3000 and you owe a $3000 payment.

If you claim a solar credit, and your tax liability is $3000, the credit would reduce your liability to zero, and any remaining credit would carry forward.  That would mean that if Schwab withheld $3000 and your liability was zero, you would get a $3000 refund.  If Schwab had no withholding, your liability after the credit is still zero, and you would owe no payment but get no refund.