Can I get the Saver's Tax Credit?

[Dezrah]

*Quick note: I have already done most of the math for the numbers I’ve listed.  If people don’t trust my numbers I can do another post to “show my work”.  Math was excluded for now for the sake of brevity.*

Brief rundown of our situation:

I was unemployed for much of 2015.  During that time, my husband and I lived off our savings and avoided going into debt.  I now have a great job with a very generous employer who has no cap on 401k employer matches.  My intentions are to contribute 78% of my paycheck starting in September to max out the 401k and claim the full match.  We will continue to draw down from our cash savings during this time to make this work. 

At some point, I realized all these above-the-line deductions were making our AGI really low, low enough, in fact, to possibly qualify for the IRS’s Saver’s Tax Credit.

For 2015, MFJ could claim the full $2k credit if their AGI was below $36.5k (partial credit up to $61k AGI).  My estimates right now show our AGI at about $25,366 not accounting for interest income (negligible) or dividend payouts (probably will be <$1k).

Here’s the rub, the Saver’s Tax Credit can reduce our tax liability but it can’t increase our refund.  So I need to make sure we owe about $2k to the IRS at the end of the year, but I’m not sure how to do that without disqualifying us for the credit.

I figure I can try to decrease my W2 withholdings but the problem is I’ve already paid about $1197.13 in Federal Income taxes and I will only owe about $1276.63 on $12,766 of taxable income.  So that’s only about $80 owed to the IRS assuming I stopped withholding FIT immediately.

Another possibility is to rollover a chunk of my 401k from a former employer into a Roth 401k with my new employer.  I have about $16.5k available to do that.  I figure I can rollover $10k, bring my AGI to $35,366, and owe an additional $1,000 in FIT out-of-pocket.

So at $1,080, I still need to find another $920 if I want the full credit, but selling any short-term capital gains or rolling-over more funds will increase our AGI and bump us out of the full credit range anyway.

Does anyone here have any ideas?

For what it’s worth, if my husband does find permanent employment and/or his own business takes off, this will all be moot but I won’t be complaining.

[Jack]

Here’s the rub, the Saver’s Tax Credit can reduce our tax liability but it can’t increase our refund.  So I need to make sure we owe about $2k to the IRS at the end of the year, but I’m not sure how to do that without disqualifying us for the credit.

...

Another possibility is to rollover a chunk of my 401k from a former employer into a Roth 401k with my new employer.  I have about $16.5k available to do that.  I figure I can rollover $10k, bring my AGI to $35,366, and owe an additional $1,000 in FIT out-of-pocket.

So at $1,080, I still need to find another $920 if I want the full credit, but selling any short-term capital gains or rolling-over more funds will increase our AGI and bump us out of the full credit range anyway.

Yep, Roth contributions (and rollovers) are the way to go. I'm not sure (without doing the math myself), but I suspect you want your AGI to be as close as possible to $36.5K without going over.

It's probably impossible for you to get the full $2000 credit; the best you can usually hope for is having a pre-saver's-credit tax liability below $2000, such that the credit reduces your liability to zero. A year or so ago I managed to get about $1500...

I figure I can try to decrease my W2 withholdings but the problem is I’ve already paid about $1197.13 in Federal Income taxes and I will only owe about $1276.63 on $12,766 of taxable income.  So that’s only about $80 owed to the IRS assuming I stopped withholding FIT immediately.

Withholding is irrelevant to the amount of credit you get (or put another way, your total tax liability). If your pre-saver's credit tax liability (i.e. 1040 line 56, calculated without subtracting line 53) is $2000 and you have $2000 withheld, that doesn't mean you "owe" $0. It means you owed $2000 and paid $2000. Similarly, if your 1040 line 56 is $0 after subtracting line 53 and you have $2000 withheld, it means you "owe" $0, overpaid by $2000, and will get the $2000 back. All the IRS means when it says the Saver's Credit is "not refundable" is that it can't enable you to put a negative amount on 1040 line 56. (Note that withholdings don't even come into the calculation until line 64.)

[MDM]

Yep, Roth contributions (and rollovers) are the way to go. I'm not sure (without doing the math myself), but I suspect you want your AGI to be as close as possible to $36.5K without going over.

It's probably impossible for you to get the full $2000 credit; the best you can usually hope for is having a pre-saver's-credit tax liability below $2000, such that the credit reduces your liability to zero. A year or so ago I managed to get about $1500...

Withholding is irrelevant to the amount of credit you get (or put another way, your total tax liability). If your pre-saver's credit tax liability (i.e. 1040 line 56, calculated without subtracting line 53) is $2000 and you have $2000 withheld, that doesn't mean you "owe" $0. It means you owed $2000 and paid $2000. Similarly, if your 1040 line 56 is $0 after subtracting line 53 and you have $2000 withheld, it means you "owe" $0, overpaid by $2000, and will get the $2000 back. All the IRS means when it says the Saver's Credit is "not refundable" is that it can't enable you to put a negative amount on 1040 line 56. (Note that withholdings don't even come into the calculation until line 64.)

+1 to the above.

Based on http://forum.mrmoneymustache.com/taxes/best-paycheckwithholding-calculator(s)/msg726237/#msg726237, perhaps the MMM case study spreadsheet will work if you don't have access to a full tax software package to evaluate your options in more detail.

[johnny847]

Yep, Roth contributions (and rollovers) are the way to go. I'm not sure (without doing the math myself), but I suspect you want your AGI to be as close as possible to $36.5K without going over.

It's probably impossible for you to get the full $2000 credit; the best you can usually hope for is having a pre-saver's-credit tax liability below $2000, such that the credit reduces your liability to zero. A year or so ago I managed to get about $1500...

Withholding is irrelevant to the amount of credit you get (or put another way, your total tax liability). If your pre-saver's credit tax liability (i.e. 1040 line 56, calculated without subtracting line 53) is $2000 and you have $2000 withheld, that doesn't mean you "owe" $0. It means you owed $2000 and paid $2000. Similarly, if your 1040 line 56 is $0 after subtracting line 53 and you have $2000 withheld, it means you "owe" $0, overpaid by $2000, and will get the $2000 back. All the IRS means when it says the Saver's Credit is "not refundable" is that it can't enable you to put a negative amount on 1040 line 56. (Note that withholdings don't even come into the calculation until line 64.)

+1 to the above.

Based on http://forum.mrmoneymustache.com/taxes/best-paycheckwithholding-calculator(s)/msg726237/#msg726237, perhaps the MMM case study spreadsheet will work if you don't have access to a full tax software package to evaluate your options in more detail.

+2

It is important to decouple your W-4 withholdings from your tax liability. Your tax withholding has no effect on your tax liability.*

*Okay technically it does in the sense that if you do not pay your tax liability in a timely manner throughout the tax year, whether it is through tax withholding or estimated quarterly tax payments, then you will owe a penalty for the underpayment of tax. However, it still remains that your tax withholding has nothing to do with your eligibility for non refundable tax credits.

[Dezrah]

Thank you all for clarification on withholdings.  That’s one of those subtle details that doesn’t come across in all these PF articles by Newsweek, CNN Money, etc.  I’ll leave that alone then and not worry about it.

I also appreciate the confirmation that it’s actually really hard (if not remarkable) to actually get the full $2k credit, so I should just be content with whatever I can get at the 50% limit.

On a slightly different note, I came across this article about rollover clarifications implemented just this year. http://www.bankrate.com/finance/retirement/after-tax-401k-rollover-to-roth-ira-rules.aspx 

If I’m reading this correctly, it looks like this could function as a Roth Conversion Ladder on steroids where those planning for ER should max out their Traditional 401ks and later convert up to $50k annually (or whatever is most tax efficient) into a Roth IRA upon retiring.  They also pointed out that since Roths don't have a minimum distribution requirement and can be inherited tax-free with Minimum Required Distributions, it's a great way for high wealth individuals to efficiently pass on their wealth to their heirs.

Honestly, all this makes it feel almost pointless to write a tax efficiency plan that is more than maybe five years out, because the rules simply going to change anyway.  Is it better to contribute to pre-tax,  post-tax, or taxable accounts?  Who knows?!  20 years from now we’ll have a whole new game.  So we just do the best we can now.  (Okay, I’m done ranting.)

[teen persuasion]

Another possibility is to rollover a chunk of my 401k from a former employer into a Roth 401k with my new employer. I have about $16.5k available to do that.  I figure I can rollover $10k, bring my AGI to $35,366, and owe an additional $1,000 in FIT out-of-pocket.

Is rolling it into your employer's Roth 401k the best option?  I would think that converting it to a Roth IRA would be preferable, for access.  Also, please correct me if I'm wrong, but don't Roth 401k accounts still have RMDs, unlike Roth IRAs?