IRA conversions and electric car tax credit

[Merrie]

Tax planning/investing/car buying question:

Buy a used 2017 Nissan Leaf (about 15k and 15,000 miles)

or buy a new one (more like 32k, maybe a little less) to get the $7500 tax credit and 2 more years of battery warranty.

Our federal tax liability was only about 3k last year and I anticipate similar this year, so I was thinking I'd convert as many of our IRAs as possible to Roths to inflate our AGI. Our state doesn't appear to have any incentives, though AEP Ohio has one, which I need to ask the Nissan dealer about.

We do have cash on hand to cover either purchase. I'd only finance if it was 0% APR and came with some incentive to finance.

We are in the 15% tax bracket currently, though converting $25k of tIRAs into Roths might push some of our income into a higher tax bracket. We are probably at least 15-20 years out from my retirement. He's 42 and I'll turn 37 this year. I'm the income earner and he stays home with the kids.

I'm not sure how to evaluate the benefits of wiping out future tax now (but for a larger initial cash outlay) vs how much that tax might someday grow to be if we did not do this and converted our IRAs later or not at all...

WWYD? Other option I haven't thought of?

[Xlar]

Tax planning/investing/car buying question:

Buy a used 2017 Nissan Leaf (about 15k and 15,000 miles)

or buy a new one (more like 32k, maybe a little less) to get the $7500 tax credit and 2 more years of battery warranty.

Our federal tax liability was only about 3k last year and I anticipate similar this year, so I was thinking I'd convert as many of our IRAs as possible to Roths to inflate our AGI. Our state doesn't appear to have any incentives, though AEP Ohio has one, which I need to ask the Nissan dealer about.

We do have cash on hand to cover either purchase. I'd only finance if it was 0% APR and came with some incentive to finance.

We are in the 15% tax bracket currently, though converting $25k of tIRAs into Roths might push some of our income into a higher tax bracket. We are probably at least 15-20 years out from my retirement. He's 42 and I'll turn 37 this year. I'm the income earner and he stays home with the kids.

I'm not sure how to evaluate the benefits of wiping out future tax now (but for a larger initial cash outlay) vs how much that tax might someday grow to be if we did not do this and converted our IRAs later or not at all...

WWYD? Other option I haven't thought of?

Just to make sure I understand you're asking: Should you buy a used car for $15k or should you buy a new one for $24.5k because you can convert $7.5k worth of tIRAs into Roths? So you want to spend ~$10k to make this roll conversion happen? Or am I misunderstanding your question?

[Merrie]

We get a tax credit for 7.5k if we buy this vehicle new, and if we have only about 3k of tax liability, that means we have an additional 4.5k of tax we could avoid. At 15% tax we could potentially avoid the tax on 4000/0.15=26,600 worth of conversions. (Probably actually less because at some point there we'll probably cross tax brackets.) Which seems like it could potentially be worth it, taking into account what the tax burden would potentially later be on that money.

[secondcor521]

I'd buy the newer one, take the tax credit, and do Roth conversions to soak up the credit.  If you convert everything to Roth and still have extra tax credit available, I'd do capital gains harvesting.

The above is assuming that the credit is nonrefundable and doesn't carry over to future years.  I didn't check and don't know offhand on those two points.

$26K of tax free funds will grow a lot in 15-20 years.

[dandarc]

when you say you're in the 15% bracket, you're counting state taxes? Because there isn't a federal 15% bracket right now.  Be sure to factor in any state tax considerations - creating an additional $20K - 26K of income might have no impact on federal, but state taxes are potentially another story.

[Merrie]

I'd buy the newer one, take the tax credit, and do Roth conversions to soak up the credit.  If you convert everything to Roth and still have extra tax credit available, I'd do capital gains harvesting.

The above is assuming that the credit is nonrefundable and doesn't carry over to future years.  I didn't check and don't know offhand on those two points.

$26K of tax free funds will grow a lot in 15-20 years.

Yes, it's nonrefundable and doesn't carry over unless you do something having to do with business, which is not relevant for us.

Thanks for your perspective. It's nice to hear from someone else that this is not a completely off the wall idea that needs to be pitched immediately.

[secondcor521]

when you say you're in the 15% bracket, you're counting state taxes? Because there isn't a federal 15% bracket right now.  Be sure to factor in any state tax considerations - creating an additional $20K - 26K of income might have no impact on federal, but state taxes are potentially another story.

Oh right. I forgot about state taxes. I'd better look into that. And I forgot that federal changed brackets too.

Looks like some serious number crunching ahead. Ugh.

What I like to do is get all my information together in December and then put it into a free tax program like TaxAct.  Then I can vary any number I like to simulate, say, a larger or smaller Roth conversion.  You can then file using whatever tool you want, but it's good for figuring stuff like that out, and it'll take into account state taxes and ACA subsidies and so forth.

Not sure you want to wait until December to buy the car, but the Roth conversion can be done any time this calendar year.

TaxAct usually comes out right around or just after Thanksgiving each year.

[Merrie]

I've never used anything like Tax Act. It's probably more accurate than my estimates.

But by my math, based on past returns (not much has changed for us since last year), we'll owe about 1k more in state tax and federal tax should shake out fine without tipping us into AMT territory. So when figuring out the math on the whole purchase I'll just need to factor in the 1k in state tax.