Very good point, fotomoto, for the people in TX (and maybe elsewhere). Yes, last week, I got a surprise email from TCEQ saying that all obligations are completed for TX rebate. So I traded-in my old car just after the 1 year anniversary of my first purchase. If anyone wants to do what I did, they need to check their state rebate's obligations to make sure they won't have to give back.
I got my free upgrade to Touring today
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Very good point, fotomoto, for the people in TX (and maybe elsewhere). Yes, last week, I got a surprise email from TCEQ saying that all obligations are completed for TX rebate. So I traded-in my old car just after the 1 year anniversary of my first purchase. If anyone wants to do what I did, they need to check their state rebate's obligations to make sure they won't have to give back.
2002
Well-Known Member
But I think HSA contributions are tax deductible? So yes they are a good idea but just like charitable donations and mortgage interest they will reduce your taxes, so you need to take them into consideration as you try and generate $7,500 of tax liability for the year.
You aren't really taking money from your retirement savings, it's just that your IRA has built up a tax liability over the years from any profits that were made and you are choosing to pay some of those taxes now. The method to do this is simple in concept, take money out of the IRA and you will owe some amount of tax. But withdrawing doesn't mean the same thing as spending, unless of course you use it to go on a cruise
but if you just move it into another savings or investment account, then from a retirement savings viewpoint it is just a transfer. Now when the funds are withdrawn they will possibly take withholding for taxes out at that time, which means you wouldn't be transferring the full amount into the new account. But next year when you file your taxes and take the $7,500 credit you should get most of that back as a refund depending on what else is going on with your taxes. You could then take the $7,500 refund or whatever amount it is and put it into the new account along with the other money.The nice thing about IRA's and 401K's is that after you reach 55 1/2 you can pick and choose when you pay the taxes, by withdrawing specific amounts in a particular year and paying just that amount of tax. A year when you have a potential $7,500 deduction would in most cases be a very good year to pay some of your IRA or 401K tax.
What you do with the withdrawn IRA or 401K funds is the same decision as any investment decision, short term long term goals etc. If you weren't' really planning on changing anything, then whatever type of fund the IRA money was in, say a stock fund, you could move the money into the same or a similar fund, and keep going. But this also means that you will continue to generate tax liability on any profits generated in the new account from that point forward. This is why a Roth IRA is usually a better choice to move the money into, because the profits generated in a Roth IRA won't be taxable when you later withdraw it. Normally there are limits on how much you can invest in a Roth IRA each year, but the Roth conversion is sort of a loophole if you will that has no limit (that I know of) on how much you can transfer from a traditional IRA or 401K.
Also, unlike regular IRAs, Roth IRAs avoid the Required Minimum Distribution after age 70-1/2.
Those who don't have $7,500 in taxes to pay can't take the $7,500 federal EV tax credit. The Roth conversion can be used to increase your tax liabilities to the magic $7,500 number. We used the Roth conversion gambit in order to qualify for the $7,500 federal EV tax credit. It's not a case of paying taxes early because those who don't otherwise have enough tax liability will just lose out on the EV tax credit. It's essentially getting a future-tax-free Roth without paying the conversion fee. The catch is that you have to have a enough money in a regular IRA--your financial adviser can tell how much that is.
2002
Well-Known Member
What I meant by paying taxes early was referring to Fast Eddie B's situation which is quite common where they have money in an IRA that they want to keep invested for retirement, they are not ready to take the money out yet. Eventually at some point in the future they will have to take it out of the IRA at which point they will pay taxes on it. A Roth conversion essentially lets them pay the taxes now instead of later while still keeping it invested for retirement. Allowing them to take advantage of a tax credit that might not be available to them if they pay the taxes later.
With the added bonus that after the conversion the invested money will no longer incur tax liability on any future profits, like it would have if it remained in the IRA.
Maybe a better term would be "paying off" the tax liability since if you convert the right amount as you mentioned the tax you owe will be equal to the credit so in a sense you are paying off the tax liability with the credit, which you would not be able to do if you withdraw the IRA money and pay off the taxes in a future year.
Also I mentioned potential mistakes to be careful of, the one that I am aware of is that apparently it is pretty easy to accidentally convert all of the money in a particular IRA to Roth, when that was not your intention. That could incur a huge tax liability for some people that the plug in hybrid credit would barely make a dent in, and it's not reversible so if DIY just be careful and pay close attention to what you are doing.
Interesting, I don't recall getting any notification for my C-Max back during the first incentive program. They may have and I just don't remember. (I have CRS)
Sorry I meant "mail", not "email". That mail really helped because I could not quite understood from the paperwork if the "1 year keep" requirement started from purchase date, rebate application date or rebate receive date. That mail cleared up this.
Did an upgrade for free earlier. 2018 base to a 2019 base. Had to pay $7,500 but will be offset by the tax credit, so basically free upgrade. Thanks to this forum.
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My dealer charged tax on the pre trade in price. But at the end of the day still got the oop cost to $7,500.
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Just to clarify, it's not the dealer, it's the state that charges sales tax. Some states will decrease the amount of tax from the trade-in, some won't.
KentuckyKen
Well-Known Member
Exactly what @2002 and @insightman said above! That’s how I got to claim the full $7,500 tax credit last year.
And it’s very easy. I just had my tax preparer tell me how much to transfer from my pretax retirement 401K to a Roth to generate a total tax liability of $7,500 counting what I had already withdrawn (and plan to withdraw) from the 401K for that year. How much has already been withheld or paid by you has no bearing on any of this. Then just a quick call to Fidelity (who has all my $ due to their great customer service) to do the Roth transfer or exchange or conversion or what ever it’s called. And I kept the investment mix the same in the Roth that I had in the 401K so nothing changed with my financial strategies. Literally took me less than 15 minutes. So if you’re retired, do the Roth thing to get the Clarity’s $7,500 tax credit. It’s super easy.
Now all the $ in the Roth and even its profits are all tax free when withdrawn. But my financial planner said it’s best for me to leave it and take my yearly withdrawals from from the 401K. YMMV.
And best of all, last April I got back almost $7,000 instead of having to pay several thousand dollars at tax time. (Took the 30% credit for my solar PV too.)
Along with the $1,000 or so saved in gas each year, it makes the Clarity cheaper than buying a used car with no warranty. It’s almost too good to be true and I’m not going to pinch myself to see if it’s a dream, ‘cause I’m living the dream!
And it’s very easy. I just had my tax preparer tell me how much to transfer from my pretax retirement 401K to a Roth to generate a total tax liability of $7,500 counting what I had already withdrawn (and plan to withdraw) from the 401K for that year. How much has already been withheld or paid by you has no bearing on any of this. Then just a quick call to Fidelity (who has all my $ due to their great customer service) to do the Roth transfer or exchange or conversion or what ever it’s called. And I kept the investment mix the same in the Roth that I had in the 401K so nothing changed with my financial strategies. Literally took me less than 15 minutes. So if you’re retired, do the Roth thing to get the Clarity’s $7,500 tax credit. It’s super easy.
Now all the $ in the Roth and even its profits are all tax free when withdrawn. But my financial planner said it’s best for me to leave it and take my yearly withdrawals from from the 401K. YMMV.
And best of all, last April I got back almost $7,000 instead of having to pay several thousand dollars at tax time. (Took the 30% credit for my solar PV too.)
Along with the $1,000 or so saved in gas each year, it makes the Clarity cheaper than buying a used car with no warranty. It’s almost too good to be true and I’m not going to pinch myself to see if it’s a dream, ‘cause I’m living the dream!
yes, it is a known fact that dealers collect taxes on behalf of the state, county, city...