Tax help needed , any CPAs here??

[lisfisher]

Tax help needed , any CPA's here??

This one has me completely beside myself and still having a hard time swallowing this. Basically, my wife took a loan out from her pension 11 years ago for down payment on home purchase. We've been making the loan payments all along but in June 2014 we were literally 3 business days late with that month's payment, so they then considered the loan "in default" and are now being TAXED on the loan balance { which is still a substantial amount } and they are considering that loan balance as INCOME in 2014. so now we not only get NO REFUND but OWE the IRS a substantial sum, according to our tax preparer { one of the major tax preparing chains }. Thing is, we are still paying the loan off and they are cashing our checks! If this isn't getting totally screwed I don't know what is. It's not like we made extra income in 2014 but are being taxed in a higher bracket regardless.

 

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[dieselram94]

This one has me completely beside myself and still having a hard time swallowing this. Basically, my wife took a loan out from her pension 11 years ago for down payment on home purchase. We've been making the loan payments all along but in June 2014 we were literally 3 business days late with that month's payment, so they then considered the loan "in default" and are now being TAXED on the loan balance { which is still a substantial amount } and they are considering that loan balance as INCOME in 2014. so now we not only get NO REFUND but OWE the IRS a substantial sum, according to our tax preparer { one of the major tax preparing chains }. Thing is, we are still paying the loan off and they are cashing our checks! If this isn't getting totally screwed I don't know what is. It's not like we made extra income in 2014 but are being taxed in a higher bracket regardless.

That sucks!!! I would definitely get a second opinion. Did they send you a 1099?


Sent from a empty soda can!

 

[TheCoinKid]

Sorry, but the advice you received is accurate.

At the point in time the loan went into default, the remaining balance, in effect, was deemed an early withdrawal from her plan, which is a taxable event. (The funds went into the plan tax deferred, so taxes must be paid at the time of the "deemed" withdrawal). Depending on her age and the type of retirement plan involved, you may also owe a 10% early withdrawal penalty, in addition to regular taxes.

My question to you: Since the money is no longer sheltered from taxes, why continue to repay the loan? She has effectively borrowed from herself in the first place (they were her funds being held by a plan administrator/trustee).

Sorry you were caught off guard, but the IRS isn't going to let someone get a tax break upfront for contributing to a retirement plan, and then not tax them when the funds are withdrawn, and Default = Withdrawal.

Not dispensing advice here, just giving you something to think about.

TCK

 

[lisfisher]

The fact that the retirement fund company has continued to receive and cash our checks since then { last June }, you would think the loan is not in default. We called them and basically said that it's not fair that because we were late a few days we are now taxed on 10k more income for 2014. It's not like we took the 10k and ran, I just don't agree with this at all. If we took all the funds out and completely disregarded the loan then yes, tax us on it. Anyway, the retirement plan company said they'd do a loan audit and go over all payments made since day 1 { 11 years ago } and if a miracle happens for us they will send us a corrected 1099 form. Not getting my hopes up but I suppose there may be a slight chance of getting lucky.

 

[Peyton Manning]

always read the small print