Home  >  Financial Articles and Q&A  >  We owe over $10,000 on our taxes?

We owe over $10,000 on our taxes?

we left our job last year, cashed our 401k out, so we could pay cash for a new house. So now that we did our taxes for 2015, that 401k money makes our income so out of whack we now have a huge bill. Is there anything we can do other than doing a payment plan?

Feb 18, 2015 by Dave in  |  Flag
7 Answers  |  8 Followers
Follow Question
2 votes

Hello Dave,

I'm sorry to hear about your surprise tax bill. As mentioned above, there are multiple contingencies relative to your specific situation as to the best possible route. With the tax due date arriving I wanted to throw this idea your way for you to entertain. If you left your employer in 2014 then that means you had earned income. Perhaps you could set up two IRAs (for you and your spouse) and contribute $5,500 per person for a total of $11,000. This will reduce your income and help reduce your tax bill. I have not fully researched it, but logically speaking I’m not sure why you would not be allowed to do this. I could see the one obstacle being if your AGI was at $95k or $178k and one or both of you were participants in an employer-sponsored plan. Again, it goes back to your specific situation.

One thing to mention is that both you and your spouse should be able to avoid the 10% penalty for $10,000 each, for a total of $20,000, if you and your spouse did not own a home for a two year period ending on the acquisition of this home.

Hope this helps!

Adam McCurdy

3 Comments   |  Flag   |  Feb 27, 2015 from Chicago, IL
Colin

As a CPA, the above suggestion does help, though the contributions would need to be made to a traditional IRA, not a Roth. Based on the information provided, Dave is not in a good position. Dave & his spouse's distribution is a taxable event and subject to the 10% early withdrawal penalty. The IRS allows for avoiding the 10% penalty from IRA plans only, not 401ks. If the distribution was from a traditional IRA, the 10% penalty is avoided but taxes are still owed on the withdrawal. If the distribution was from a Roth IRA, both the 10% penalty & tax is avoided. Dave, I hope no licensed expert gave you the advice to cash out your spouse & your own 401k to finance a home purchase because the tax bill will be especially painful obviously. Best bet is to contact the IRS to settle on some sort of payment plan.

2 likes | 
Flag |  Mar 02, 2015 near Oak Creek, WI
Adam McCurdy, CFP®, EA

You are right about the penalty, Colin! I interconnected the two type of accounts. In a previous comment someone mentioned the $10,000 exemption limit and I remembered that applied to both spouses for a $20,000 total limit. I forgot that it applies only to IRAs.

Flag |  Mar 02, 2015 near Chicago, IL
Colin

Yep, you're right...$10,000 exemption limit per individual so essentially a $20,000 limit for married couples. Feel sorry for Dave, but they made a big mistake cashing out their 401ks for a house purchase (and I presume this isn't their first house).

Flag |  Mar 02, 2015 near Oak Creek, WI

1|600 characters needed characters left
0 votes
Richard P Taylor Level 17

Likely there isn't much you can do, particularly if you are past 60 days from withdrawing from your 401K. My advice would be to speak with an accountant/CPA directly to make sure.

2 Comments   |  Flag   |  Feb 18, 2015
Dave

someone mentioned something about if you used the money to pay for primary residence you may be able to avoid penalties

Flag |  Feb 18, 2015
Richard P Taylor

Sorry about that last post. Ha. IRA's typically have the ability to take assets from the plan pre-591/2 years old to pay for a home if it's a first time home buyer. However, It's capped at $10,000. This only means you will not be penalized. You will still be taxed. I am unaware of that being possible with a 401K. However, each 401K plan is different and it could have a provision in the plan that would allow for something along these lines. Again, I would check with an accountant/cpa to be sure. I would also contact your 401K plan provider to find out if there are any special provisions relating to this.

1 like | 
Flag |  Feb 18, 2015

1|600 characters needed characters left
0 votes

The IRS rule is if you haven't owned a home in the last 2 years or is a first time home buy you can take out early without the 10% penalty. You will still have to pay the taxes on the withdrawal but you can avoid the penalty up to a $10,000 withdrawal. Not sure why you would take the funds out to buy a home especially with mortgage rates sitting as low as they are currently. As far as the tax situation find a CPA and see if they have any suggestions because I am not aware of any way to lower your tax burden based on the information given.

2 Comments   |  Flag   |  Feb 20, 2015
Steve Casull

And lastly, the way to lower their tax burden is to take out a mortgage and pay off the tax burden, which is probably at a much higher interest penalty than the Mortgage rates you so astutely mentioned

Flag |  Feb 20, 2015 near South Jordan, UT
Steve Casull

As I mentioned, depending on the 401K articles, they may be able to take out part of the 401K without penalty. Most 401K articles provide for loans. There may be a
vesting schedule. As I also mentioned, it is hard to give specific advice because "everyone's situation is different".

Flag |  Feb 20, 2015 near South Jordan, UT

1|600 characters needed characters left
0 votes

First, I'm sorry to hear that you have the stress of a sizeable tax bill and that you may have received advice that was not truly in your best interest or at least did not fully explain the tax impact. I would recommend speaking to a CPA, your advisor and your lending institution to find out all of the alternatives to consider and determine the proper path. (Whether payment plan, loan, IRA contributions or other alternatives that may help mitigate the liability).

1 Comment   |  Flag   |  Feb 23, 2015 from Johnston, IA
Steve Casull

I started my firm to give good, REAL, factual, and sometimes blunt Financial Advisory services. I FINALLY realized that jumping from firm to firm, no matter the praise I received by the recruiter, the new firm would end up being just like the one I was leaving. Every firm I have been with was the same. And they were all afraid to be sued, so they would always refer people to their "tax advisor" on even the most obvious aspects of their accounts. Bah Humbug! Based on the limited information in the question. I fall back to my advice of, provided you both have jobs now in the same line of work you both left, take out a mortgage for only the amount of total tax due. Remember you may get to use $10K of that total, because you're buying a new home, provided the various exclusions are met. Also, you have 60- days to return the money to a qualified plan. Did the home purchase fall into the next year and align also with that 60 day period? In my first response I ask if you got a good deal on the house. Was it still depressed in price from 2009? If so this even adds more credence to my advice. Not only do you have to pay to live somewhere, but you will likely have a good equity position when housing returns to stability. I advised several people to go buy homes the months folowing the downturn knowing full well the market had to return. God only made so many houses, and the population is growing. Buy low, Sell HIGH.

Flag |  Feb 23, 2015 near South Jordan, UT

1|600 characters needed characters left
0 votes

I sincerely wish there was a little more information to arrive at the best solution for the question. The option for a home equity loan with their existing banking relationship (or shop around for the best rates/closing costs) may be the best option to retire the tax debt. Ideally there is ongoing cashflow to pay off the liability (or other income opportunities and assets to do so).

Comment   |  Flag   |  Feb 24, 2015 from Johnston, IA

1|600 characters needed characters left
0 votes
Jess Peterson Level 1

Contact an enrolled agent with the IRS. If you've pulled money out of a 401(k) before 59 1/2 unless an exemption applies in your case, that's income. Your going to have to talk to someone (enrolled agent) about alleviating that debt or working out a debt payment plan with the IRS.

Comment   |  Flag   |  Feb 27, 2015

1|600 characters needed characters left
-1 votes
Steve Casull Level 13

If this was a 'first time home buy' or it has been over 5 years since your last home purchase, the 401K articles could allow for the waiver of penalties. The hard part in answering these questions is EVERYONE's situation is different. Did you get a GREAT deal on the home? Not just an alleged good deal as stated by your real estate agent, but a GREAT deal? How old are you and your wife? Think of the IRS as the mortgage lender, and the payment plan the house payment. This is what I call "LIFE CHANGE ADVICE". My firm doesn't charge for this, and you can see just how valuable it is. You need to find a real Financial Advisor, NOT a salesman brochure dispenser.

1 Comment   |  Flag   |  Feb 18, 2015 from South Jordan, UT
Steve Casull

You may need to find a mortgage lender and take out a 30 year mortgage on the minimal balance. The Reason I say 30 Year is to keep the REQUIRED payment low. You can always add money to the payment to payoff the loan sooner, but if you have a bad luck patch and incomes are curtailed you will want as low a house payment as possible. If you miss a house payment, boom your credit is dinged, and refinancing becomes futile.

Flag |  Feb 19, 2015 near South Jordan, UT

1|600 characters needed characters left