Tax credit/withholding question

August 18, 2023 1:13 PM

This is probably a really dense question, but here we go!: Living in US, considering getting solar panels...would need a lot of them, which would result in a large tax credit. But we never owe money at the end of the year since we always use 0 on line 5 of our tax form (and also don't make a huge amount). Do we need to change the withholding/line 5 to not say 0 anymore to use the credit or am I thinking about this wrong and we would be refunded for what we paid in taxes throughout the year based on the tax credit?
posted by Eyelash to Work & Money (5 answers total)

Your withholding is prepayment of Total Tax Owed.

Credits are subtracted from Total Tax Owed.

So withholdings don't affect credits at all.

Think of it like this, you go to a furniture store to order a $5000 couch that won't be delivered for 5 months. You make a deposit of $1000 and get a payment plan for $1000 per month (this is equivalent to withholding).

When the couch is delivered there is some problem with the delivery so they give you a 20% discount. You may end up getting a *refund* of the money you paid on the payment plan. You can see that your payment plan (or withholding) changes the total price due on receipt but not the total that you paid for the couch.

The complicated part is refundable vs. non-refundable credits. This matters for people who have low or no Total Tax Owed without the credit. This could come up if your total tax owed is like $24,000 but the solar credit is $30,000. Look at your tax return from last year and compare you Total Tax Owed (NOT tax due) to the anticipated credit. I don't know the exact line item but start with the page with your signature and go backwards line by line until you find it.
posted by muddgirl at 1:21 PM on August 18, 2023 [1 favorite]

OK I just looked at my tax forms from last year and what you want to compare is line 24 of your 1040 - this is Total Tax.

The credit will reduce your Total Tax and thus will either increase Overpaid (line 34) or reduce Amount You Owe which is line 37. Withholdings are totaled on line 33 and these also increase Overpaid or reduce Amount You Owe.

Sorry if I caused any confusing when I talked about Total Tax Owed!
posted by muddgirl at 3:00 PM on August 18, 2023 [2 favorites]

Response by poster: Thank you muddgirl, I really appreciate your help!
posted by Eyelash at 4:45 PM on August 18, 2023

Iirc unused solar tax credits carry over to the following year if you don’t use it all.
posted by MisantropicPainforest at 4:52 PM on August 18, 2023 [2 favorites]

Seconding MisantropicPainforest. We just last year got the solar credit and it was greater than our income tax for the year. So our final tax bill was zero, we got back all of our withholding for the year, and have some more credit to apply to our tax bill for 2023. NB: Tax credits for electric and hybrid cars work differently. If your tax bill is zero, the unused credit is not carried over.
posted by DrGail at 1:45 PM on August 19, 2023