carryovers from a MFS year to a MFJ year

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  • #7925
    RustyShackleford
    Participant

    I am thinking of filing MFS (married filing separately) this year, because wife’s income is far higher (I’m retired) and I can get some very advantageous use of the 10/12% tax brackets.

    Unfortunately it means that I will lose out on $300 or so of foreign tax credits – because MFS I have to do Form 1116, whereas filing jointly we do not exceed the trigger for that (since she has no foreign holdings in taxable accounts).

    Worse, I will lose out on $1000 or so of tax credit for a solar PV installation (exceeds my tax liability).

    I understand that normally the unused portions of these credits can be carried over to future years. I just want to confirm that if we file MFJ (married filing jointly) next year, that we’ll still be able to use those carryovers on our joint return (at which point we’ll be able to fully use them).

    #7927
    kaneohe
    Participant

    See if the link below applies and also verify as they ask you to do. Do you really get more benefit filing MFS than MFJ? I be inclined to calculate both ways to be sure you’re getting a net overall benefit.

    How to Calculate the New Federal Solar Tax Credit in 2020

    “Is the Value of the 26% ITC Refundable?
    What if you’re eligible to receive the ITC, but you don’t owe any taxes this year? Will the IRS send you a refund check for $3000, using the above example? Unfortunately, the 26% ITC is not a refundable credit. However, per Section 48 of the Internal Revenue Code, the ITC can be carried back 1 year and forward 20 years. This means that if you had a tax liability last year but don’t have one this year, you can still claim the credit. If you had no tax liability last year or this year, you can keep the credit on your books and use it any time you have a tax liability over the next 20 years.

    Once again, we’re not tax attorneys, so please be sure to verify all of the above ITC information with your tax representative.”

    #7929
    RustyShackleford
    Participant

    Thanks, but I don’t think that link addresses the MFS/MFJ issue. Two things did catch my interest though:

    1. Carrying the ITC “back one year” ? Even looking at theForm 5695 info, I’m not sure what that means. Does it mean tax liability in 2019, as well as for 2020, would count towards the “limitation based on tax liability” ?

    2. I saw that if construction commenced in 2019, I’m eligible for the maximum 30% credit even though I didn’t complete the project in 2019. That is good news indeed !

    #7932
    kaneohe
    Participant

    Yes, I didn’t think the MFS/MFJ was addressed so still an open issue. The main thing that caught my eye was the carryback feature. I think that means if your credit is limited by your tax this yr, you can also use last yr to get all/part of the remaining credit if you had a tax liability.
    (similar to FTC).

    I guess I was thinking that if you re-evaluate the MFS/MFJ issue and found that the MFS was not advantageous, you wouldn’t have the MFS/MFJ issue w/ the tax credit. Supposedly the MFS benefit exists but is rare……I think I recall is some issue about student loans where only one has a big loan. But perhaps yours is another case where it is true.

    #7936
    RustyShackleford
    Participant

    Page 24-25 of Publication 514 (https://www.irs.gov/pub/irs-pdf/p514.pdf) actually describes mechanics for carryback and carryforward for situations where MFS and MFJ are involved. It looks a bit complicated, but the main point is that you’re not screwed, you’re going to be able to take that credit at some point.

    It’s tempting to assume similar rules would apply to the solar credit. But if not, it’d be a show-stopper for my doing MFS this year, despite the advantages described in my earlier post, since I could leave as much as $1000 of the solar tax credit on the table (if I use all of that $10K headroom in the 12% bracket for LTCG instead of Roth conversion).

    Unfortunately I can’t wait to answer the question until I’m making the final decision on MFS versus MFJ, because the answer will inform my investment actions before year’s end, that is, the aforementioned taking of add’l LTCG and Roth conversion.

    It’d really be rather shocking, if I were simply disallowed from carrying the unused credit forward, simply because of changing filing status, would it not ?

    #7938
    RustyShackleford
    Participant

    Unfortunately the post seems to have disappeared where I showed my calculations for why I’m pretty sure MFS is advantageous for me this year. It basically boiled down to $20K of LTCG and QDI income I have, that would be taxed at 15% instead of 0% if we MFJ. The fact some of my wife’s ordinary income would be taxed at 12% instead of 22% almost exactly cancels that out, i.e. I’m at the break-even point. But with MFS, I have $10K of headroom in the 12% bracket, for Roth conversions and taking LTCGs; this is a lot more advantageous than the $7k Roth contribution I could make with MFJ, since it comes from pre-tax money.

    #7946
    kaneohe
    Participant

    Sounds like an opportunity if you’ve done the numbers. btw……you don’t happen to live in a community property state by any chance. At least in CA, I believe you have to split the income 50-50 even if filing MFS.

    #7947
    RustyShackleford
    Participant

    North Carolina, which is NOT a community property state, if I understand correctly.

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