AboutHelen P. O`Planick, EA Expertise I am a tax professional, with experience in individual taxation. I would prefer not to answer questions about non-resident aliens or corporate taxation. Please do not ask me state related questions, unless the state is Pennsylvania. There are 42 taxing states and 42 TOTALLY different sets of state tax law.
Experience I have been preparing tax returns almost all my life. I have been in professional practice for 25 years and I am enrolled to practice before the Internal Revenue Service.
Organizations National Association of Enrolled Agents
Publications I am a prior Money Magazine Tax Test taker and have been quoted extensively in all media including monthly periodicals and books by tax authorities.
Question QUESTION: Hi,
I Have recently resigned from my job of 24 years. I am 45y.o. living in Chicago, Il. currently separated with a 4 y.o. and not living with them.
I will be rolling my 401K to an IRA, probably on June 9th. My balance is approx. 123K minus my personal loan of 18K, leaving me with approx. 105K to rollover. I need to pay off my credit card and personal debt totalling 25K. I am also in the process of drawing up my business plan to incorporate a small business and will need another 20K-25K for initial startup with additional funding from investors. So total withdrawal will be near 50K.
I know i will be incurring a 10% early penalty plus my tax rate. My adj. gross income for 07 was 60K and my taxable income was $45K-line43, $6,5K-line44, total tax $5,5K-line63. I ended up having to owe the IRS $2350, because i went exempt the last 4 mos. Which i also have to pay back, included with my debt total. My IL. state refund was $119.
My questions are;
1- What will i have left over, if any. To invest or save?
2- Since i resigned and do not expect to make as much money this year, what could be my tax rate? I am receiving unemployment now, approx. $1022 every 2 wks., taxed to $889 net and maxed at $9594. I think since i have resigned i will not get the benefit anymore, or may even have to pay back what was already given.
3- What was my tax rate for 07?
4- Can you offer any suggestions to save on my taxes? Since i will be doing an early withdrawal?
I look forward to any advice you might have. Thank you.
Greg
p.s. Thank you for letting me know about the CAPITOL LETTERS. I did'nt know it was considered rude and unprofessional.
ANSWER: Greg, thank you for retyping. If it was a short note, I can usually handle the caps, but I was getting lost! :)
You are not going to have a lot left over I'm afraid. I can't speak for IL, but for the federal, if you take out what you are thinking you need - you are going to be taxed and penalized on 68,000. You did not calcalute the loan in the 50K. So, I don't know what you made to date, but let's assume 30K.
Your 2008 income will be 30+68+10 or 108K. Taking your standard deduction and personal exemption, your taxable income is going to be around 98,200, which is taxed at an approx 22%. The INCOME tax will be 21,600 and the penalty is 6,800, so you stand to pay in in taxes $28,400 to the IRS. Even if you have to pay back the UC, you are still looking at a fed tax bill of 26,000. And if you have to pay that thru the savings in your 401K, that is just going to make matters even worse.
My suggestions - DO NOT take out the money. Find another way to structure your bills and the start up capital.
The less you can take out, the less you will owe in taxes.
As for your 2007 rate - it was approx 14%.
Helen, EA in PA
---------- FOLLOW-UP ----------
QUESTION: Thanks Helen for your quick response!
So now we know that it won't be a good idea to use my 401k money but, i have no other way to pay off my credit card and personal loan balances. I am not working and have to take care of those balances to clear up my credit and stop incurring penalties and extra fees. Once the unemployment ends or ceases, i will not be taking in any more paychecks. I am looking for work, but that is not really going well at the moment, and i'm working towards my business goals. So i can't have, nor will be able to afford any unpaid bills.
YTD total income is $21,624 and Taxable income is $20,612, from the job i resigned from.
Add the 401k loan of $18k and the $10k unemployment, i am looking at $48k income for this year so far.
1- What if i only take out $25k to cover my bills?
2- How much will i need to withdraw from my IRA to cover the $25k plus taxes and early withdrawal?
3- I am going to incorporate, so won't i have some business deductions to help with the tax hit?
4- Do you have any thoughts about someone i can speak with here in Chicago?
Thanks for your time answering my questions. I look forward to any advice you might have.
Greg
ANSWER: I'm going to start at the back and then semi woose out on you a little.
First of all, I do know a great CPA in the ChiTown area. Her name is Beth Mowry Thomas (I don't know if she uses Mowry or not). You may be able to find her going thru her husband's website. That is www.fairmark.com. They live in Lisle.
As for the incorporating and expenses, will you get a tax break? That really depends on so many factors, including the entity of choice. And that decision is difficult to make without knowing so much about you and your reasons why you think you need to incorporate.
Now to the tax. Remember, you have a loan on the plan, so already you are in the hole $1,800 for the penalty there. Add in penalty for the 25K, you are not in the hole $4,300 in JUST penalties.
Adding 25K to the 48K less your deductions is still going to leave you around the 15% bracket, so taxes (not penalty) are around 9K, which gives you a bill of around 13K. And then if you take out taxes to cover that, you now owe another 1,300 in penalty and a minimum of $2000 in tax, so now you need another $3300 out.
It is a never ending cycle. And you will have to deal with IL tax too.
If you cannot find Beth (and you can tell her Helen sent you) let me know and I'll find a few others pros in your area.
Helen, EA in PA
---------- FOLLOW-UP ----------
QUESTION: Thanks,
I spoke to Beth's husband today and he was very informative. He also said they are not taking on clients and specialize in their business of publications.
So, if you can, i will need some contacts in the Chicago Metropolitan area. I need to sit down with a tax professional to lay out all my options, and go from there.
Thank you very much for your time and efforts.
Greg
Answer This is the best of the best.
Good luck!
Mr. Robert E. McKenzie, EA, JD,TCP
Website: www.mckenzielaw.com
Work Phone: 312-876-6927
Fax: 312-876-0288
Email Address: remckenzie@arnstein.com
Practice Description:
Address Information
Work
Arnstein & Lehr
120 S Riverside Plz Ste 1200
Chicago, IL, 60606-3910
