How do you create tax liability for tax credits?

Not paying tax is not legal, but having your withholding changed for a different number of dependents is. Just don't over-do it, because under withholding too much may cause a penalty. The idea is to adjust things so that they balance out come tax time.

 

No, don't do that. That is estimated tax withholding, not your actual tax liability. Changing withholding doesn't change your tax liability at all, but might create penalties for underpayment.

For many wage/salary people, their federal tax liability will be the same as all their federal tax withholding taken from their paychecks throughout the year, minus their federal tax refund coming next April. But don't count social security, medicare, or state income tax withholding, those are unrelated tax buckets.

If you pay quarterly estimated tax, or roll over tax refunds as payments for next year's taxes, then things get more complicated.

I wrote in more detail last week: End of EV Tax Credits coming? | Page 7 | PriusChat

If your taxable income this year is not high enough to create $4502 in federal income tax, and you need more taxable income to report to the IRS, one quick fix is to perform a Roth Conversion of an appropriate amount from a Traditional IRA. Convert just the right amount to create the tax you need, don't convert an entire large account because that can easily create far too much tax at once, and defeat much of the purpose of putting money into the IRA in the first place. If you don't understand how to do this yourself, don't ask me, go ask a tax account or preparer for how much to convert, then ask your IRA financial house how to do it. And start now. After Christmas probably won't allow enough processing time, and after New Year's Eve is simply too late.

Active traditional 401(K) and similar retirement accounts might have similar features for Roth conversions or contributions, but that may well depend on employer program rules. Roth 401(K) features were added 'after my time' in the workplace, so I never had much reason to look at those rules.

 

are you confusing tax liability with tax payments?

 

As above you need to look at FORM 1040 Total Tax, not the residual amount owed after withholding or estimated taxes. If you are still low on total tax owed, some of the things you can do are transfer traditional IRA to Roth IRA, sell stocks, etc. take money out of IRA, etc. to generate income. Year end tax planning, shall we say.

Better yet do your own sample calcs Turbo Tax or other program.

 

Yes but not the way you are thinking about it.
No matter how much is pre-paid by withholding, the "owed" amount is still the same and the credit is applied to that amount.
Your pre-paid amount comes in AFTER that.

 

Glad I have a good tax man.

 

ah george, we miss thee.

 

i think you're confuse. from the total amount of money you earn, does the federal government take any taxes at all?

 

If you have money in an IRA, you can transfer it to a ROTH IRA to create a tax liability. You don't have to be particularly accurate, as you can "recharacterize" that transfer next year to the precise amount that optimizes your situation. Be sure to do the transfer before the end of the year. The recharacterization has to be done before you file your return (April 15, or even up to October 15 with an extension). Amazing, but you can change your prior year's income with the recharacterization. Whatever you leave in the ROTH escapes taxation so long as you leave it there long enough. The paperwork defies understanding, apparently even to IRS people. So I include a copy of the recharacterization receipt with my tax return.

 

In the simple worker situation, the only way to 'create tax payment' is to have a large enough wage or salary to owe enough federal income tax. The easiest way for us to answer that is to have you show us your tax forms from last year, and your latest pay stub. But that may not fit your privacy preferences.

You don't need to give us public answers to the questions below, but you do need to at least answer these to yourself.

So look at your latest pay stub. How much federal income tax has been withheld so far this year? (Don't count FICA, SSA, Medicare, state taxes, etc.) Is it over $4000 dollars, trending to exceed 4500 by the last pay cycle of this month? How much do you expect to get refunded to you next April? Subtract that out. The remainder is your 'tax liability'.

My very quick (and hopefully not too inaccurate) look at the tax charts suggests that an unmarried taxpayer, no kids, no 401(k) or IRA deductions or other special adjustments, no investment or other income, needs to make $43,522 in reported wages to create an income tax of $4502. Absent any other taxes or credits, that is enough income and tax to get the full Prime credit. If your income and taxes are less, then you'll get less credit on a Prime.

By 'reported' wages, I mean that any 'under the table' income doesn't count towards this credit. If you don't report the income, you are already (illegally) getting a better deal than this Prius Prime incentive. Until it is time to draw Social Security, that is, then you may get shorted.

If you are married, have kids, itemize deductions, make 401K or IRA contributions, have non-wage income, or are affected under any of zillions of other financially different situations, then the numbers change. Check a tax professional for more details specific to your situation. And don't confuse me for a pro.

'Non-refundable' doesn't mean that you are out of luck if you have too much estimated tax withholding from your paycheck. It means that you lose out only if your paycheck is too small to create the taxes in the first place.

=================
My quick and simplistic tax calculation, for 'Single' filers only:
$4,050 personal exemption --> $0 tax
$6,350 standard deduction --> $0 tax
$9,325 limit for 10% bracket--> $932.50 tax
$23,797 in the 15% bracket --> $3569.50 tax
---------- Summed Totals -------------------------
$43,522 income creates -------> $4502 in Federal Income Tax
Prius Prime maximum credit -->$4502 tax credit
Total tax (after credit) = $0.00 -->> get ALL of your income tax withholding back as a refund.

 

Seems like we are not getting through.

IF you have any net federal tax going to the IRS, then that is your tax liability. It makes no difference if it gets there by way of withholding or by direct payment. It is still your tax liability.

The fact that in previous years you pre-paid too much makes ABSOLUTELY NO DIFFERENCE to this discussion.

When you do your return, there is a box near the end that says something like "This is the tax you owe." THAT is what the credit is applied against. The fact that the boxes right after that show that amount that you already paid makes no difference in this discussion.

 

Taxman Mr. Thief

Posted via the PriusChat mobile app.

 

I keep trying to think of analogous situations to help explain the concept that seems to elude people, but so far I haven't found any. The best I can come up with so far is it would be as if for some unknown reason you decided to send weekly checks to your credit card company ahead of time as prepayment for what you estimate you have been spending that month. Then when the bill arrives at the end of the statement period it will show your charges for the month, as well as your prepayments. At the bottom it will show what you "owe". That amount might be a credit, or an amount owed, depending on how much you prepaid compared to how much you spent.

So let's say your prepayments for the month totaled $900 and the charges that month were $1,000. So you owe them $100. Would you say that you only spent $100 that month? No you spent $1,000, regardless of what you may or may not have prepaid. Although probably few people would do this, I think most people would understand how this works. But people struggle with the concept of tax withholding vs. liability when the concept is really the same.

Okay to really make the analogy it would be as if you didn't get a bill from your credit card company at the end of the month, but they made you create your own bill using their template where you fill in all of your charges and credits and payments for the month based on your receipts, and you add it all up and then send the bill that you created to them along with a check based on what you calculated that you still owe, or in case you overpaid indicating how much they owe you as a refund. And you never hear from them unless you make a mistake and they catch it.

That's what the IRS does. So I can understand why people can get confused.

 

And if you make a mistake they catch, not only do you need to send them the difference, they charge you 11% interest for failing to figure out what they apparently already know you owe...Amazing...

 

That rate is outdated, it is currently 4%.
https://www.irs.gov/pub/irs-news/ir-17-053.pdf

When the IRS thinks I made a mistake and duns me for the difference, I immediately pay in full along with filing my appeal. When they finally agree with me a few months later, they refund that money plus interest at the same rate. I've profited from this several times (100% success rate so far), though sadly the modern interest rates are so low that my 'profit' isn't enough to cover the labor cost of writing the appeals and documenting my case. But at least they pay better interest than does my credit union.

 

Look at line 54 of your 2016 Form 1040. That's where the electric car tax credit went last year. We'll assume the 2017 form is very similar. The credit cannot exceed the tax you owe. If the credit is $4500, but you only owe, say, $3000 in total tax for the year, you only get a $3000 credit. It does not carry forward or back to other tax years. If you've already paid some of that tax liability in withholding, no problem, you'll get a refund.

I like the idea of doing a Roth conversion or other tax generating actions...IF that makes good financial sense in its own right.

 

THIS is where the confusion comes in.....using the term "owe".
Your tax liability is the amount that you WOULD HAVE OWED if you did not withhold anything and did not make quarterly payments.
Your credit cannot exceed that amount.

Your total tax liability has NOTHING to do with the amount that you pre-paid.