Do I still need to make estimated tax payments if nonrefundable (solar and PHEV) tax credits will reduce my underpayment to zero or less?

[MarcM]

Most of my income is reported on W-2s and has withholding, but I have some freelance work that usually results in a modest tax bill. TurboTax is estimating that I should pay a few hundred dollars each quarter next year, which is correct were it not for two complicating factors:

1) I bought a new PHEV and installed a solar system on my roof, so my actual tax due after these nonrefundable credits will be virtually zero, and I will be getting a hefty refund on the withheld amounts.

2) I sold a chunk of stock early in the year that I’ve had for a very long time, so there will be a lot of tax due on that, but the PHEV and solar credits will more than offset it.

The IRS instructions specify that if your tax due will be less than $1000 after refundable credits, then you will not owe a penalty. But I can’t find anything anywhere about what happens with non-refundable credits (which the solar and PHEV credits are).

Do I still need to pay estimated tax (or update my W-4 to increase withholding) even though my liability will be almost zero, or do I still need to do that even though it’ll all come back to me because they’re nonrefundable tax credits? Or am I in the clear because my actual liability will be less than withholding?

[KatherineC · Accepted solution]

The most likely reason for your tax liability is due to Self-Employment tax on your freelance work.  There are very few credits that will reduce the Self-Employment tax.

So, while the credits will reduce your regular income tax, they won't reduce your Self-Employment tax.  If your expected withholding is enough to cover any expected Self-Employment tax, you do not need to make estimated tax payments.

If that is not the case, you can either make estimated tax payments or increase the taxes withheld instead of making estimated taxes.

[MarcM]

Thank you, that's very helpful!

Just to make sure I'm parsing everything correctly, you're saying that if my liability on non-self-employment tax plus capital gains are reduced by credits enough that the the excess withholding is enough to cover the Self-employment tax amount, I'm okay.

That is, in very simplified terms, no additional withholding or estimated payments are necessary if:
 [withholding] - [W-2 income tax] - [capital gains tax] + [nonrefundable credits] > [self-employment tax due]

[KatherineC]

That is correct.

[KatherineC]

You might want to look at your income/taxes withheld towards the end of the year.  You can always adjust your withholding for the last couple of months.