Does the %30 Federal Tax Credit apply to the Self Employment Tax?

[dmainmon]

I installed a solar panel system for my home last year (2015). I am self employed and do not receive any W2 forms, only 1099. I also do not file quarterly so I receive a $77 penalty. I am trying to use TurboTax (online Home & Business version) to do my taxes but I am not getting the full %30 this year. According to TurboTax, I still owe over $4000 in taxes due to the Self Employment Tax which is around that amount. This was explained to me by a TurboTax support specialist. I was elevated to the third level of support after several days trying to work this out with TurboTax. After all, I was expecting the solar system cost to completely offset my taxes and not owe anything this year. The strange thing is that TurboTax calculates the %30 accurately, but will only give me %20 of that this year and push the rest to next year. Here's how TurboTax shows the credit. For a system costing $26,105, my Home Energy Credit is $1772 with the additional $6,060 carried forward to 2016. However, I still owe over $4000!!!!! Shouldn't it be zero? (see attached image)
The TurboTax support specialist told me that the Home Energy Credit must not apply to the Self Employment Tax (which I believe is a federal tax).
Is this true? Do I really owe just because I'm self employed?

Basically, the turbotax people are telling me that if I worked for someone else and had a W2 I would not have the Self Employment Tax where apparently the credit doesn't apply.

This can't be right.
f you see the attached image there is a link on the TurboTax page showing my credit : Did I get the full credit?
If you click this link it shows the following:
Residential Energy Efficient Property - If you placed things into service like photovoltaic cells, solar water heater, wind generators, geothermal heat pumps or fuel cells:

- The amount of your credit allowed is limited to the amount of your remaining liability after we have considered your residential energy property (doors, windows, etc.). If the remaining tax liability is less than your credit amount, any amount not used to bring your tax liability down to zero, will be carried forward to the next year.

So shouldn't the amount due for my federal taxes be zero instead of over $4000 ???

Note: I did learn something from this experience: the Self Employment Tax. I did not know this existed. I guess there is a special tax for anyone that is self employed. So unless you work for someone else and receive a W2, you get an additional tax!! In my case it's over $4000! My income was a little over $30,000. Ouch!

[wblanford]

If you work for someone else 6.2 percent of you gross income is deducted from your income for social security tax. The employer also pays 6.2 percent. If you are self employed, you have to pay both parts. For the self employed the 12.4 percent is calculated after all your business deductions. This social security tax is separate from your income tax, but is collected by the IRS.

[J.P.M.]

If you file a tax return and are liable for taxes, you are eligible for all the benefits and consequences. See you accountant or a qualified tax professional.

[dmainmon]

Thanks Bill. That makes sense.

[HX_Guy]

Sorry to say but I think you may be unpleasantly surprised here. I went through this exact same thing with a 1099 that my wife received as a realtor. While our solar tax credit was enough to cover our regular W-2 income tax liability, we still had to pay $546 tot he IRS due to the self employment tax liability on the 1099. From my understanding, none of the solar tax credit can be applied toward self employment tax liability associated with 1099 income.

Now that doesn't mean you don't get any benefit, the credit still applies to the taxes owed as regular income, just not the self employment tax.

For example, say your 1099 income is $50,000 and you file as single. That $50,000 you would pay approx 25% in income taxes on ($12,500), which you could apply the solar tax credit to, but you would also owe approx 15.3% additional in self-employment tax ($7,650) which you cannot apply the solar tax credit toward.

Schedule SE on your 1040 explains explains how to calculate this. Basically your net profit from Schedule C, multiplied by 92.35%. If result is more than $400, then you over Self Employment tax. The result of the previous, if under $117,000 (in 2014) you multiply it by 15.3% and that's your tax owed. If over $117,000, then multiply by 2.9% and add $14,508 (again this was for 2014).

Of course this is overly simplified and you'll have other deductions and so forth or different filing status but gives a general idea overall of how it is handled from my understanding.

[Fafrd]

Sorry to say but I think you may be unpleasantly surprised here. I went through this exact same thing with a 1099 that my wife received as a realtor. While our solar tax credit was enough to cover our regular W-2 income tax liability, we still had to pay $546 tot he IRS due to the self employment tax liability on the 1099. From my understanding, none of the solar tax credit can be applied toward self employment tax liability associated with 1099 income.

Now that doesn't mean you don't get any benefit, the credit still applies to the taxes owed as regular income, just not the self employment tax.

For example, say your 1099 income is $50,000 and you file as single. That $50,000 you would pay approx 25% in income taxes on ($12,500), which you could apply the solar tax credit to, but you would also owe approx 15.3% additional in self-employment tax ($7,650) which you cannot apply the solar tax credit toward.

Schedule SE on your 1040 explains explains how to calculate this. Basically your net profit from Schedule C, multiplied by 92.35%. If result is more than $400, then you over Self Employment tax. The result of the previous, if under $117,000 (in 2014) you multiply it by 15.3% and that's your tax owed. If over $117,000, then multiply by 2.9% and add $14,508 (again this was for 2014).

Of course this is overly simplified and you'll have other deductions and so forth or different filing status but gives a general idea overall of how it is handled from my understanding.

what about tax on income from capital gains, dividends, and interest? Can the solar tax credit be applied to offset those taxes?

[dmainmon]

Yes. I guess the good news is that I will get the full %30 over time since the remaining credit rolls forward to the next tax year. So, next year I'll be faced with the same situation and the remaining credit should roll forward again. So as long as I don't die in the next few years I'll get the full credit on the Federal Taxes (but not Social Security or Medicare).

My Federal Taxes are zero but Medicare and Social Security total over $4000 and the credit does NOT apply to Medicare or Social Security. Apparently Medicare and Social Security are nondeductable. That's basically what's going on here.

[dmainmon]

The bad news... If you are self employed, you end up paying 6.2 % more in taxes than someone making the same amount but working for an employer. The employer pays 6.2% as well. The self employed person pays the full 12.4 %. All of which is non-deductable.

[cebury]

I didn't read the whole thread nor the responses but the answer is yes turbotax is calculating the same way our commercial-professional tax software did...the credit did not offset my self employment net income. You will roll it forward each year until it's used, presumably before the current ITC regulation expires.

[DaveDE2]

The bad news... If you are self employed, you end up paying 6.2 % more in taxes than someone making the same amount but working for an employer. The employer pays 6.2% as well. The self employed person pays the full 12.4 %. All of which is non-deductable.

It's actually more than that. Self employed people making less than $118,500 pay double FICA and double Medicare for a total of 15.3%.