2011 TAX TIME Questions

[dgpcolorado]

It wasn't a very efficient strategy because it also raised my tax bracket, but it was better than nothing. ...

Since you wouldn't have actually PAID any of the tax generated in the higher bracket, I don't see the issue.

This is subtle and a bit difficult to understand unless you also live entirely off of savings, as opposed to "earned income". If I hadn't boosted my tax bracket by making the large Roth IRA conversion I could have dribbled the conversion out over many years a few thousand dollars at a time. That would have left me in my usual 0%-10% tax bracket. By doing the large conversion I am paying 15% tax on a portion of the converted money and 25% on another portion. This means that the benefit I get from the $7500 credit is somewhat reduced because I could have avoided paying some of those taxes entirely, so it is offsetting taxes I otherwise wouldn't have had to pay anyway. That's why I say it isn't an efficient tax strategy: I don't really get the full benefit of the tax credit.

Hope that makes sense. Life is different when one has a very low, and entirely discretionary, income. I have to draw on my IRAs every year to boost my income to the top of the 0% bracket just to avoid "wasting" it. The idea is to eventually get all of my remaining traditional IRA converted to a Roth IRA by age 70, when mandatory distributions are required. That's easy for me because I don't have much money and I've been living off it for thirteen years (I retired at age 45), but for someone with half a million to a million dollars in an IRA it takes some careful planning to optimize the shift.

 

[davewill]

... That's why I say it isn't an efficient tax strategy: I don't really get the full benefit of the tax credit. ...

Got it. You don't get the same benefit you would if you could roll the tax credit over to multiple tax years and spread it out.

 

[dgpcolorado]

... That's why I say it isn't an efficient tax strategy: I don't really get the full benefit of the tax credit. ...

Got it. You don't get the same benefit you would if you could roll the tax credit over to multiple tax years and spread it out.

Yes, that's one way of looking at it. Come to think of it, my solar panel tax credit did get spread out over many years and I used the last of it this year. I plan to increase the size of my array this year and will start the process all over again (assuming that Congress doesn't kill the credit).

 

[thankyouOB]

i see what is going on Colorado, but I dont see how it got you into the 25% bracket.
that starts about 70k and 9k in taxes for a couple.
maybe that is a wrong assumption.

 

[dgpcolorado]

i see what is going on Colorado, but I dont see how it got you into the 25% bracket.
that starts about 70k and 9k in taxes for a couple.
maybe that is a wrong assumption.

For single filers it starts way below that! For TY2012 the 25 % bracket is $35,351 – $85,650, which is only slightly above the levels for TY2011. For married, filing jointly, the 25% bracket is $70,701 – $142,700 for TY2012.

 

[garygid]

25% fed, 10% state, 15% (self-employed) Social Security tax = 50% :roll:
Then, 7.75% Sales Tax, Property Tax, DMV fees, etc. ...

 

[vin944]

Checked mine and it says due for deposit tomorrow the 15th. I did not include the 2.5K CV rebate. I will keep everyone posted.................

Got it!

 

[ttweed]

If I hadn't boosted my tax bracket by making the large Roth IRA conversion I could have dribbled the conversion out over many years a few thousand dollars at a time. That would have left me in my usual 0%-10% tax bracket. By doing the large conversion I am paying 15% tax on a portion of the converted money and 25% on another portion. This means that the benefit I get from the $7500 credit is somewhat reduced because I could have avoided paying some of those taxes entirely, so it is offsetting taxes I otherwise wouldn't have had to pay anyway.

There is one mitigating factor that I believe you have left out of this analysis--the differential in future tax on the earnings of the amount contributed to the Roth vs. leaving it in the IRA. While all earnings from the Roth IRA will be tax free from the moment you converted, unless you "dribbled" the same amount out of your IRA at a rate that keeps you in the 0% bracket, you simply defer tax on the IRA earnings for that period while the Roth appreciates taxfree. The longer the period, the greater % of the tax you will pay when the funds from the IRA are withdrawn will be attributed to earnings rather than principal (given that your IRA does actually appreciate over those years and not shrink, as many have seen their portfolios do since 2007 ). If you do take it out at a rate that puts you in a 15% bracket in order to shorten the timeframe, as seems to be your plan, around 5% compounded (or whatever your rate of return is on your account) of those taxes you will pay in each succeeding year on the later IRA withdrawals are avoided by doing the large Roth transfer earlier and paying the 25% rate in one lump. It's not going to be a net positive effect--the basic premise of your argument is correct--but it will be a little less painful than you think, and you will actually benefit from a greater portion of the $7500 credit than your calculation above represents, I believe. The higher earning performance of your account, the better the situation becomes.

Or else I just haven't had enough coffee this morning and I'm not thinking about this correctly at the moment. We bought the car instead of leasing, and we also made a Roth conversion like you in order to raise our income into a higher bracket so we could get the full tax credit this year, and we have also been living largely off our retirement account savings for the last 7 years, augmented in the last year by some SS income. We converted equity holdings early last year in the hope that the earnings could be substantial if the market keeps coming back.

TT

 

[linkim]

25% fed, 10% state, 15% (self-employed) Social Security tax = 50% :roll:
Then, 7.75% Sales Tax, Property Tax, DMV fees, etc. ...

Self-employed folks can deduct half of the social security (SS) payment so the total above is less than 50%. Should be reduced by 6.2% (half of SS without including Medicare in a typical year, I think). Because in 2011 the SS was lower (4.2%, I think) the % is slightly different. I file Schedule C, E as self-employed and use TurboTax, which calculates the deduction for SS.

 

[dgpcolorado]

There is one mitigating factor that I believe you have left out of this analysis--the differential in future tax on the earnings of the amount contributed to the Roth vs. leaving it in the IRA. While all earnings from the Roth IRA will be tax free from the moment you converted, unless you "dribbled" the same amount out of your IRA at a rate that keeps you in the 0% bracket, you simply defer tax on the IRA earnings for that period while the Roth appreciates taxfree. The longer the period, the greater % of the tax you will pay when the funds from the IRA are withdrawn will be attributed to earnings rather than principal (given that your IRA does actually appreciate over those years and not shrink, as many have seen their portfolios do since 2007 ). If you do take it out at a rate that puts you in a 15% bracket in order to shorten the timeframe, as seems to be your plan, around 5% compounded (or whatever your rate of return is on your account) of those taxes you will pay in each succeeding year on the later IRA withdrawals are avoided by doing the large Roth transfer earlier and paying the 25% rate in one lump. It's not going to be a net positive effect--the basic premise of your argument is correct--but it will be a little less painful than you think, and you will actually benefit from a greater portion of the $7500 credit than your calculation above represents, I believe. The higher earning performance of your account, the better the situation becomes.

Or else I just haven't had enough coffee this morning and I'm not thinking about this correctly at the moment. We bought the car instead of leasing, and we also made a Roth conversion like you in order to raise our income into a higher bracket so we could get the full tax credit this year, and we have also been living largely off our retirement account savings for the last 7 years, augmented in the last year by some SS income. We converted equity holdings early last year in the hope that the earnings could be substantial if the market keeps coming back.

TT

Your coffee intake this morning was fine: Yes, I try to tell myself that getting the money into a Roth IRA sooner to grow tax free may have some benefit. But the reality is that if tax rates are the same paying taxes now versus paying them later is a wash (because the money you are paying in tax is not earning a return).

In my case, since some of the money would be converted at a 0% rate and most of the rest at a 10% rate, doing the conversion sooner at 15% and 25% is not beneficial. If, however, the choice is to do that or lose some of the EV tax credit, then it is an easy decision.

 

[thankyouOB]

i think the smart thing is to hedge your bets. it is impossible to know what tax rates will be in the future.
I think the educated guess is that they will be higher, but then you have to figure out if you will be in a lower bracket, too.
keeping a balance, so that you can have some in IRA and some in Roth adds flexibility.
There is also the required payout period to consider for the IRA, as well as the Roth benefits as a bequest.

 

[thankyouOB]

just heard from the enrolled agent; who is my tax preparer.
neither of the EV and EVSE forms were in the computer database that his vender uses, but he was able to manipulate them to get both the full EV and EVSE credits. Because I had to pay about $400 for the EVSE overage on the Blink, that credit is about $140.

so, apparently it is doable.
I will have to see what the IRS thinks, but I am owed back almost all my job withholding.
.

 

[Rat]

I had no problem using Turbo Tax and got the refund 6 days after e-filing, including the $7500 credit.

 

[vin944]

I had no problem using Turbo Tax and got the refund 6 days after e-filing, including the $7500 credit.

Did you claim the $2500 CV rebate?

 

[mwalsh]

Still in IRS hell/limbo here...6 weeks after filing. Only due a refund of $174.00 too!

 

[cdub]

Still in IRS hell/limbo here...6 weeks after filing. Only due a refund of $174.00 too!

Did you change your withholding and withhold too little income taxes or something?

 

[oakwcj]

Still in IRS hell/limbo here...6 weeks after filing. Only due a refund of $174.00 too!

Misery loves company. I'm doing the limbo, too. My tax lawyer friend thinks that the IRS is giving closer scrutiny to randomly selected returns claiming the EV credit. I hope that's all it is. I called the IRS a week ago and was told that my return was in the "examination" or "investigations" department. The agent said that I might or might not be asked for additional information and that it might or might not be related to the EV credit. I assume it would be trivial for the IRS to check the VIN against DMV records. My friend also believes that they will act on my return before April 15, because they will owe me interest for any delay after that. We shall see.

 

[FairwoodRed]

My return took 6 or 7 weeks and they wouldn’t do direct deposit either. Hang in there because if they sent me a huge check, they’ll probably send yours too.

 

[thankyouOB]

yes, I had heard a few years back about IRS concern about people claiming conservation credits and big car credits when they didnt own the vehicles.
It would seem logical that they are doing some kind of crosscheck with DMVs or, more likely, holding out some portion of the EV claims to seek verification from the filer, such as sending in a copy of the sales document or VIN registration.
As consumer items go on low 6-figure and down AGIs, this is about as big a credit as you can claim without the IRS having some independent 1099 or K1 to crosscheck.

 

[MaryC]

I found my fed refund deposited in my account today. I was really surprised as I sent a paper return via snail mail the week after the Presidents holiday, so I thought it would take a lot longer. So just about 4 weeks from mail in to refund for me.