Will Solar tax credit erase early 401k withdrawl?

[Capobvious]

Hi, I have a solar tax credit this year (and for 5 yrs if I don't have that much liability). I was wondering about early withdrawal from my 401k to pay for a number of outstanding debts. Will that tax credit wipe out my early withdrawal penalty? thanks in advance!

[AnnetteB6]

Yes, on Form 1040 the early withdrawal penalty is added to your total taxes before the residential energy credit is taken into account.  Therefore the credit would go toward reducing the early withdrawal penalty.

@Capobvious

[Capobvious]

Thank you!!   Im kind of a extreme novice to taxes, really. But this means as a "credit" of lets say 9500 --for the solar, it would essentially erase it (my 401k penalty),  and my income tax liability for this year and....theoretically still receive a refund check from federal and state gov? 

[AnnetteB6]

The solar credit would reduce your tax liability by the amount of the credit.  As long as your total tax liability is less than the credit amount, then you could receive a refund if you had Federal tax withheld from your wages or if you qualified for a refundable tax credit.  Any unused credit can also be carried forward.

There would not be an effect on your state return with regard to the Federal solar energy credit.

@Capobvious

[Capobvious]

THANK YOU!!!

[Critter]

NOOOOOOOOO!!!!!   WRONG !!!!!

The solar credit can ONLY be applied against the regular income tax ... it will NOT NOT NOT cover the early withdrawal penalty.  

This is a good way to increase your tax liability to use the credit however it will not cover the penalty. 

[Capobvious]

ok, so the tax "expert" said it will be ok, and you say it won't be. Where do I get a definitive answer on this?

[AmeliesUncle]

Critter is correct.  The solar credit can offset the income tax from the 401k withdrawal, but not the penalty.

However, there is a waiver to the 10% penalty this year if you were affected by the COVID situation.  So the penalty might not apply.

[AnnetteB6]

@Capobvious

This 'expert' was not an expert in answering your question.  Critter and AmeliesUncle are correct. 

I made a mistake when looking at the Form 1040 to give you your answer and I am sorry to have misled you with the incorrect answer.  However, I am glad that the mistake was caught and you now have the correct answer.  

[Capobvious]

Thank you all for replying! My issue is what would be my tax liability that the credit erases? lets just say i take out 20k, how does that translate to the income tax? I know now, 10% is a penalty but what is the income tax?

TIA, you guys are wonderful btw!

[Critter]

That depends on your other income ... it can be anywhere between 0% and 30%.  

[Capobvious]

I guess my question is what is my income tax on a 401k withdrawal of 20k? 

And as per the other responses the solar tax credit will not wipe it out completely. 

[Critter]

Again it depends ... if the $20K is your ONLY income then your tax on that would be less than 10%.  But if your income would be $300K   then your tax would be at a 25% rate. 

[Capobvious]

ok, so if it takes out 20% withholding.....from the 401 withdrawal...Ill get that 20% back in my return because of the solar credit? Is that right?

[Critter]

In the simplest theory yes ...  if you are using the downloaded version why don't you use the What If   or   Testing  tools to try different scenarios ...

This is my mini version of  a tutorial  that should be in the downloaded program: 

 

What is Forms Mode?

Forms Mode lets you view and make changes to your tax forms "behind the scenes."

If you're adventurous, you can even prepare your return in Forms Mode, but we don't recommend it. You may miss obscure credits and deductions you qualify for, and you may forget to report things that will come back and haunt you later.

Forms Mode is exclusively available in the TurboTax CD/Download software. It is not available in TurboTax Online.

Related Information:

• Why would I use Forms Mode?
• How do I switch to Forms Mode in the TurboTax for Windows software?
• How do I switch to Forms Mode in the TurboTax for Mac software?

If you want to play around with different figures and tax scenarios without affecting your original return you can ….

• >>>In the TurboTax CD/Download software by creating a test copy: 
• 1.  Open your return in TurboTax. 
• 2.  From the File menu, choose Save As. 
• 3.  Give the copy a new name to distinguish it from the original (for example, by adding "Test" or "Example" to the file name). 
• 4. Click  Save. You are now safely working in the test copy and anything you do here will not affect the original. 
•  https://ttlc.intuit.com/questions/1900642-how-to-make-a-test-copy-of-your-return

• >>  use the WHAT IF tool: 
• - Click Forms Icon (upper right of screen) or Ctrl 2 (forms view) 
• - Click on the Open Form Icon 
• - In the “Type a form name.” area type What-If (with the dash), click on the name of the worksheet - click on Open Form 
• - You will see the worksheet on the right side of the screen; enter the information right into the form 
• - To get back to interview mode - click on the Step-by-Step Icon (upper right of screen) or Ctrl 1

It's always a good idea to make a backup copy of your tax data file, in case your original gets lost or corrupted. Here's how:

1. From the File menu in the upper-left corner of TurboTax, choose Save As (Windows) or Save (Mac).
2. Browse to where you want to save your backup.
   • Tip: If you're saving to a portable device, save it to your computer first to prevent data corruption. Then, after completing Step 4, copy or move the backup file to your device.
3. In the File name field, enter a name that will distinguish it from the original tax file (for example, add "Backup" or "Copy" to the file name)
4. Click Save and then close TurboTax.
5. Restart TurboTax and open the backup copy to make sure it's not corrupted. If you get an error, delete the backup and repeat these steps.

If you make changes to your original tax return file, repeat these steps to ensure your original and backup copies are in-synch.

Related Information:                             

• Retrieve a Tax File from a Portable Device
• What's the difference between the tax data file and the PDF file?

AND save it as a PDF so you have access to a copy even if you don’t have the program still installed and operational :

• How do I save my return as a PDF in the TurboTax software for Windows?
• How do I save my return as a PDF in the TurboTax software for Mac?

AND protect the files :

• How can I protect the tax files on my computer?