IRA’s

[Tbag57]

We bought a Tesla 3 this week and qualify for the $7500 tax rebate. How much do I have to convert in my regular IRA to my Roth IRA to incurred $7500 in taxes? We both contribute the max to our regular IRAs each year to knock our taxes down to zero. I would like to skip contributing to regular IRAs this year.

[MindyS2]

Congrats on the Tesla purchase, also contributing to an IRA.  The amount that you can convert from a traditional to a Roth IRA to have $7500 worth of tax liability will depend on your other income, tax bracket, and filing status.

Turbotax offers a Tax Caster program that you can estimate your income and change the numbers to see how a conversion will affect your taxes.  The tax caster is currently set up for 2022, tax laws and tax rates may change from year to year.

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

[K M W]

Congrats on the purchase of the new Tesla!

Converting money from your IRA to your ROTH IRA will be taxed at your current tax rate - so the answer depends on your filing status and what your income is BEFORE considering moving money from a pre-tax to an after tax ROTH account.

For example, if you are single and your taxable income was $50,000, you are in the 22% tax bracket, and the next $1 of income would be taxed at 22%. In that situation, moving $10,000 would generate federal  taxes of $2,200. However, if you were married and filing a joint return and the joint taxable income was $50,000, then you would be in the 12% tax bracket, and the next $1 of income would be taxed at 12%, so moving $10,000 would generate only an incremental $1,200 tax bill.

You also have to look at when adding income would move you into a higher tax bracket. Let's take the example of you being married and filing a joint return, and your taxable income for the year before moving the retirement money was $50,000, or the 12% tax bracket. Once  your taxable income goes over $89,450, that amount over $89,450 will be taxed at 22%. So, in this example, if you were going to move $50,000 between the retirement accounts, the first $39,450 would be taxed at a 12% rate, then the next $10,550 would be taxed at a 22% tax rate.

You would have to look at the tax brackets for your filing status to determine the exact dollar amount that would generate $7,500 of incremental taxes. And while you are doing that, keep in mind that there are income limitations to qualify for the $7500 tax credit, so converting money from a pre-tax to an after-tax retirement account may raise your income to a level where you are no longer eligible for the tax credit.

[Tax Hero Niki]

Hi Tbag57,

This is an excellent question and a lot of people get mixed up with owing at tax time, versus the tax liability. I'm not sure if this is how you are thinking about it, but for everyone reading this,  let's be crystal clear.

So, you don’t need to owe taxes at tax time to claim this credit. You need to have a tax liability, which is different from owing. When you file your taxes, TurboTax calculates your tax liability, which is driven by your income. Then, when you claim the EV tax credit, you can eliminate up to $7500 of this tax liability. Whatever you had in withholdings throughout the year will then cover what’s left of the tax liability, and the remainder is your tax refund.

It is true that the EV credit is nonrefundable, which means that you can’t get back more on the credit than your tax liability, which is different from what you owe when you calculate your taxes.

Your tax liability, like I mentioned above, is impacted by your income and your household size. For example, if you are filing MFJ with no dependents, and your combined taxable income (income after factoring in the standard or itemized deductions) is greater than $100,000, you will most likely be able to see the full benefit of the EV tax credit, even with the IRA contributions. So don't feel like you'll need to miss that tax benefit to get the EV tax benefit!  You can use this income tax table to see where your tax liability lies.