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!
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.
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?
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.
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.
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?
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.
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.
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!
That depends on your other income ... it can be anywhere between 0% and 30%.
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.
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.
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?
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:
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.
If you want to play around with different figures and tax scenarios without affecting your original return you can ….
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:
If you make changes to your original tax return file, repeat these steps to ensure your original and backup copies are in-synch.
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 :
AND protect the files :