For the sake of discussion, let’s assume that in the absence of any one-time credits, I am trending towards a total Federal Income Tax burden of $20,000 for calendar year 2025.
Let’s also assume that the solar panel system that I am in the process of having installed on my home is completed, approved, and activated in November 2025 as planned. For the sake of round numbers, let’s assume that the 30% federal tax credit would knock $15,000 off that otherwise $20,000 tax burden for 2025.
When it comes to the “110% of my 2025 taxes” safe harbor test for 2026 tax planning, would my target be $5,500 (110% of the total net burden) or would it be $22,000 (110% of what that burden would have been without the solar tax credit)? Or would it be some other number?
It will be 110% of the Form 1040 line that says “This is your total tax” On the 2024 form, that’s line 24. Could be the same for 2025, or it could be different.
It will include any benefit from solar tax credits because those are non-refundable credits that show up on line 8 of Schedule 3, which you are given credit for on line 20 (before line 24) of the 2024 Form 1040.
Edited to add: If they were refundable credits, they show up in the “Payments” section, after your total tax is calculated. So refundable credits do not reduce your safe harbor amount for the following year.
Thanks, AJ — As always, I appreciate your wisdom and insights.
In reality, I expect to aim for closer to 100% of my 2026 tax burden. Due to highly variable investment income, however, I typically find that it’s difficult to get a solid estimate of what that amount is much before November of any given tax year. The “110% of prior year” safe harbor has traditionally been my go-to approach to stay in the IRS’ good graces, get reasonably close, and keep my take-home paychecks fairly consistent.