I owe $36,000 in income tax for a year during which I earned NO income

Originally posted by timidgal
reply to post by Tachalka

 

Again, my genuine thanks for the comments. It's nice to know others find this inconceivable.

Yes be thankful you such a large 401 K to draw from. This truly is a blessing, as most Americans do not. Best wishes toward a quick recovery for you.

Originally posted by Domo1

I was severely disabled for most of 2010 and earned absolutely no income. I collected approximately $35,000 through an employer-sponsored private disability plan, which was considered taxable income

Do you owe $35k or is the $35k taxable? I'm going to assume you mean the $35k was taxable, because if you owed that much for one year of income tax you are doing pretty well. I would consult a CPA, and not one that works for H&R Block.

Unfortunately, medical disability, beyond certain actual medical expenses, doesn't fall under the hardship provisions of the IRS code and aren't exempt from the penalty. Of the $35,000, nearly $22,000 went toward COBRA premium, which in NYS, is the highest in the nation and is not included in the definition of "certain medical expenses". This amount, plus the distribution, put me into a 28% tax bracket so I owed the full 28% on $22k and the majority of the distribution not considered a hardship dispersement, plus an additional 10% penalty on $22k and the balance of the distribution. If my illness was chronic, I could have enacted a provision whereby my entire fund was disbursed evenly over 5 years with a waiver on the penalty but this was not the case.

Originally posted by SavedOne

Originally posted by timidgal
I collected approximately $35,000 through an employer-sponsored private disability plan, which was considered taxable income

Originally posted by timidgalA person who worked hard, earned a decent income and paid more than her fair share of taxes for more than 20 years, all the while never turning down a chance to help other people in need, finds herself in a situation where she owes Uncle Sam $36,000 because she was too sick to work

We can all agree that we're overtaxed, but I think in this case you've made a rather large mistake because it's literally impossible for you to owe 36,000.00 in taxes on a 35,000.00 declared income. The absolute worst case scenario is if you're single, that would place you in the 15% tax bracket which works out to 5250 in taxes. But it's likely that you won't owe anything close to that after your medical write-offs are incorporated. Don't try to figure this out yourself, go to a tax consultant. People make these sorts of mistakes all the time because they think their taxes are "easy" and they can do it themselves. There are no such things as "easy" tax returns, they don't exist.

I would be thrilled if this was right but the $35k was just disability benefits. You need to add to distribution which gives you your Adjusted Gross income. I am single and because of divorce, I only had one dependent credit. My bracket was 28% plus a penalty on full distribution which was solely used for tuition.

Believe me that I didn't calculate this myself and left it to my accountant. I'm hoping he made mistakes that will be caught by the tax attorney.

Originally posted by intrptr
reply to post by timidgal

 

I don't know if anyone brought this yet or if it even applies to you ( I hope so)...

Disability income taxable?

This was a good find which everyone should read because we should all know this.

I think I confused some by calling it a "private policy" which implies I paid the premiums (in which instance the benefits ARE NOT taxable). This was a group plan provided by my employer for which THEY paid the premiums so my benefits were taxable income. They could have given me the option to pay the premiums myself post-tax, wihich would have made benefits untaxable but they chose, instead to pay the premiums to take the tax deduction on the insurance premiums. This made benefits taxable income.

Originally posted by timidgal
This is one of many perfect examples about what is wrong with the US tax system and how our social and fiscal systems do absolutely nothing to take care of those who support it.

I was severely disabled for most of 2010 and earned absolutely no income. I collected approximately $35,000 through an employer-sponsored private disability plan, which was considered taxable income because my employer, for whom I worked my a** off for many years, was too cheap to give their employees the opportunity to pay the relatively small group disability premiums themselves with post-tax dollars (they had the choice to either give their employees the tax break or pay the small premiums themselves, thereby taking a corporate tax deduction and making any employee disability benefits taxable to the sick employee). Since I had two kids in college, I had no choice but to take an early distribution on my 401(k) in order to pay two college tuitions for kids who will probably graduate to find no jobs available. The tuition is not something I am complaining about because I would do anything to give my kids the slimmest chance of success in the future, but the overall theme is just disgusting.

A person who worked hard, earned a decent income and paid more than her fair share of taxes for more than 20 years, all the while never turning down a chance to help other people in need, finds herself in a situation where she owes Uncle Sam $36,000 because she was too sick to work (and believe me, almost half of that disability money went toward paying COBRA insurance premiums and the remaining money went toward uncovered medical expenses) and had no choice but to take money from her retirement savings to pay her kids' tuition so they wouldn't be kicked out of school.

Don't get me wrong - I know there are plenty of people who, in my situation, wouldn't have had disability benefits or retirement savings to fall back on, but that is neither here nor there. I worked hard and paid dearly for those benefits (which in this case is an oxymoron). Had I not worked so hard all those years, the system would have had no choice but to take care of me through public entitlements and the such. My tax dollars went towards supporting many folks in that position when they couldn't help themselves - and I was more than happy to participate in a system that supposedly helped take care of their own - but how is it fair that the same is not extended to me in my time of need? With the inequities of the 1% and a system that is plainly not equitable "to all" in times of need, is it any wonder that we've seen a continuous deterioration of those folks formerly known as the middle class, the true backbone of our society?

I feel for you and I know the system is against us but you are withholding major facts about your situation. You didn't have to pay 36k on on the disability you received. If your story is true...you had to pay major tax for early 401k withdrawal, you could have asked on any forum on the Internet including this one and realized there is a major tax on most early retirement withdrawals. I feel for you because it's broken but your ignorance and lack of prior research in the matter(I assume lack of research due to your upset attitude) isn't a reason to pout here...the reason for the promised return on retirement plans is partially due to the fact that the money is to held and invested until XXXX year at which point you'll start receiving it and taking it early disrupts the process. The early withdrawal tax is absurd but not hard to predict with one simple google search. The fact of the matter is that you did not do your homework and liquidated your 401k early without research.

Originally posted by pacifier2012
So you're saying you never bought enough disability insurance to cover this event?

and now it's someone elses fault?

edit on 18-4-2012 by pacifier2012 because: (no reason given)

It was not a private policy so I had no choice on the level of benefits and you're missing the point. This is not about the amount of benefits I received or whether I think they were enough but how if you're disabled, it doesn't seem fair that I should be taxed when I've paid taxes for 20+ years to help others who were not as fortunate as me (and we're talking in the hundreds of thousands of dollars over 20+ plus years.

Could I have found a way to play the system and receive certain entitlements? Probably yes but I never would have taken the money from people less fortunate than myself. All I'm saying is that when the time came that I needed help, there was none and that's not right.

Capital gains -is- income.

You were taxed fairly.

Originally posted by timidgal

Originally posted by pacifier2012
So you're saying you never bought enough disability insurance to cover this event?

and now it's someone elses fault?

edit on 18-4-2012 by pacifier2012 because: (no reason given)

It was not a private policy so I had no choice on the level of benefits and you're missing the point. This is not about the amount of benefits I received or whether I think they were enough but how if you're disabled, it doesn't seem fair that I should be taxed when I've paid taxes for 20+ years to help others who were not as fortunate as me (and we're talking in the hundreds of thousands of dollars over 20+ plus years.

Could I have found a way to play the system and receive certain entitlements? Probably yes but I never would have taken the money from people less fortunate than myself. All I'm saying is that when the time came that I needed help, there was none and that's not right.

Every single person who makes an early withdraw from a 401k plan and doesn't qualify for an exemption has to pay the penalty tax. It's right on the IRS website, and when you sign for the withdraw it's on the paperwork by law.

This penalty tax has nothing to do with how long you've paid taxes, or how much assistance you did or did not qualify for.

If you honestly do not understand about the penalty tax (meant seriously, not sarcastically) you need to find a new accountant. A real one, not H&R Block, or Liberty, or any chain place like that. Because your accountant did a poor job of explaining what is going on.

Originally posted by timidgal

Originally posted by pacifier2012
So you're saying you never bought enough disability insurance to cover this event?

and now it's someone elses fault?

edit on 18-4-2012 by pacifier2012 because: (no reason given)

It was not a private policy so I had no choice on the level of benefits and you're missing the point. This is not about the amount of benefits I received or whether I think they were enough but how if you're disabled, it doesn't seem fair that I should be taxed when I've paid taxes for 20+ years to help others who were not as fortunate as me (and we're talking in the hundreds of thousands of dollars over 20+ plus years.

Could I have found a way to play the system and receive certain entitlements? Probably yes but I never would have taken the money from people less fortunate than myself. All I'm saying is that when the time came that I needed help, there was none and that's not right.

Read my post, the problem is with your early 401k withdrawal...not with disability. Have you looked at the paperwork they gave you to reference the source of the taxes? An early retirement withdrawal is insanely taxable...

It has to do with the way the funds were deposited...they may have been put in prior to pay check meaning they were deposited tax-free(you have never paid tax on the retirement account money-it was deposited pre-tax), the intent is that you'll pay taxes on the money later when you receive it when you're 65. This helps generate more money for the account as more money is available to be invested. So if you were going to get an instalment of $1000 a month then x% for taxes would be taken out each time. When you liquidate it early you are receiving raw untaxed income and you owe the taxes on that income since they were never paid due to the nature of the deposit...the same way as if you earned it working somewhere.

reply to post by sligtlyskeptical

I can't believe I've been challenged to defend my statement but if that's the way you want to play it...

So how much did you take from your 401k? Since you posted that you spent the whole $35,000 in disability on deductible medical expenses that would mean $35,000/ .075 = over $400,000. So obviously you did not spend it all on the expenses you cite. If you seriously want help you need to come clean. Regardless if you spent the disability on medical, that income alone should have resulted in taxable income of about $15,000 after the standard deduction and 3 personal exemptions. Tax on $15,000 is $1646 for a head of household.

Firstly, how presumptuous of you to assume my medical expenses couldn't have possibly been that much or that I'm hiding anything. You've obviously never known anyone who was struck with a rare disease. I'm lucky to have survived. You happen to be wrong and how much I've been able to earn and save over the years is none of your business. I've already admitted I worked very hard and was appreciative of how fortunate I was. None of the distribution was taken at the time of my treatment so none of the $38,000 was eligible for a hardship withdrawal nor was it eligible for a health tax credit because it didn't exceed 7.65% of my income. We've already established that the entire $35,000 (which was really closer to $38k but I rounded down for two dependent deductions and not three) was all taxable income. $38,000 * .28 = $10,640. Not that it's your business to judge, but I had to take an $80,000 distribution. Federal income tax due my head of household with self and one dependent tax bracket is 28% (another child is claimed on ex- spouse's taxes as per a divorce agreement). Only tuition paid for MY dependent was considered hardship. Nevertheless, $80,000 * .28 income tax = $22,400. I had a 10% penalty for the child not declared as my dependent, which added another $4,000. So we have $10,640 + $22,400 + $4,000. After other deductions, the net, as of now, is around $36,000. If you want to be bitter about how much money I might have made or the schools I worked hard to send my children to, there's nothing I can do about it but it doesnt change the fact that it took 20 years of blood, sweat and tears to get to that. Oh yeah, and a whole lot of taxes to support our system.

Not sure where you live, buy let's say that state and local taxes are 10% or $3600. Even if for some reason you can't claim the exmption for the early withdrawal. That means another $3600 in IRS penalties. Leaves $28,800 in Federal Tax at a minimum. Under current tax rates this means you withdrew at least $135,000 from the 401k. Pretty expensive college isn't it?

We already established your calculations are based on wrong assumptions but regardless, how I spend my hard earned money is none of your business.

Something tellls me you yanked your entire 401K when you became disabled. a big mistake. if you would have staggered it over a few years things would have worked out better.

Fortunately, I did not because of factors not discussed relative to my divorce. Again, I'm extremely fortunate, more so than many others, but that doesn't change any of my points and I'm now in a position where I will, eventually have to drain my retirement money due to the snowball effect.

In the end, I'll admit that I wouldn't mind your comments if they were for the purpose of pointing out mistakes my accountant might have made, but they were clearly skeptical of my assertions and in that, I do take offense.

reply to post by Furbs

I would agree on the distribution although I feel that the hardship provisions should be revised. I knew about the penalty and the fact that I had no other resources from which to draw upon is unfortunate but you have to pay the price; however, I don't see how one could reason that a disability benefit qualifies as a capital gain.

Sorry you were sick.
But the $36k was income.

Whatever you do, don't use J.K. Harris. That group ripped me off for $700.00. All I got was a file extension letter and a tax form with labels, in the mail. I could have gotten both free from any library. They lie. Con you into putting a deposit up front and that is about all you will see or hear from those guys again. Once they take your money, they will ignore your calls and if you can get into their very secure building, you will never see the person that took your money again.

I thought it was funny when the IRS called me and I told them I was being represented by J. K. Harris, and they laughed. I didn't know it then but the joke was really on me.

I ended up having to pay the IRS $8,000 from the $13,000 they originally said I owed. This was after working a deal with them. That $700.00 would have come in quite handy at the time.

Pick your help very carefully. Especially if they are asking for any money up front. Either way, I found out after I lost my money to these crooks that I was not the only one that has been burned by those vultures.

Good luck. You are not alone.

Go to a larger CPA firm to have your taxes done, it's worth the money. You should not have to pay anything. Read the IRS tax law and it clearly states if you took an early distribution due to disability. Find the loop hole, believe me, it exists.

www.irs.gov...

Distributions that are not taxable, such as distributions that you roll over to another qualified retirement plan or a distribution of your designated Roth IRA contributions are not subject to this 10% additional tax. For more information on rollovers, refer to Topic 413.

There are certain exceptions to this additional tax. The following six exceptions apply to distributions from any qualified retirement plan:

Distributions made because you are totally and permanently disabled

reply to post by timidgal


You need to see an accountant. If you took early distribution of a 401k because of disability then you do not owe taxes on the entire amount if any. You really need to get someone that knows tax law to do your taxes.

Hey, the good news is that If your lawyer works 100 hours and gets the debt totally dismissed ... you'll break even!

reply to post by timidgal


I am sorry for the hard times you are facing. It is truly unjust. I think of all the aid and money we send to countries like Israel or who ever....don't want to go there but I can't think of the many examples there are.....and we can't even give back to the ones who make the party possible. I swear sometimes things like this are the strongest motivation to stay radical and never fully commit to helping the system. I will never give my life blood to tyranny, and this is one form of it. Americans are taxed and have no say what so ever. Where is our bail out?

We fought a revolution over this. Remember "no taxation without representation!"
Do they really want us to do it again, because we will.

It sucks because we want to do the right thing but they keep pushing us into this corner. GOD DAMN IT!
The wrong things are looking like the only way to go the more we are treated like this.

I hope you get to keep your head above water and I think you deserve the best for living up to our values. I will pray for you.

To all you "we pay all the taxes" take a look at this poor hard working woman....she paid her fair share, but uncle Sam takes care of bankers more than its people. You know the banks that press a few buttons and "poof" you have a huge loan for a business you want or whatever sham scheme you can think of. That is, unless you are an average American trying to build his country up with a good idea and the work ethic to match your balls to try your luck. You have to be a jerk off company that screws its employees to catch a break. You know those companies that are traitors and would rather turn a bigger profit even if it means hurting the people of the nation that gives them the business they need to exist.

Good luck ma´am. Have a good day.

Originally posted by timidgal
reply to post by Furbs

 

I would agree on the distribution although I feel that the hardship provisions should be revised. I knew about the penalty and the fact that I had no other resources from which to draw upon is unfortunate but you have to pay the price; however, I don't see how one could reason that a disability benefit qualifies as a capital gain.

Disability benefit isn't capital gain.

Your 401k withdrawal is your capital gain.

reply to post by timidgal


$35,000 - 8,500 (standard deduction) - 7400 (2 exemptions) = $19,100

$19,100 + $80,000 = $99,100

Federal Tax on $99,100 = $19,549 + $4,000 penalty = $23,549 total federal tax

Head of household tax rate of 28% doesn't occur until earnings of $119,000.

Your Cobra premiums are deductible if you itemize. $18k is much more than 7.5% of your AGI.

You are either not sharing the complete story or you have an absolutely terrible tax preparer.

A woman who works with me is a single mother, and is taking care of someone else kid and going to school. Since she is working with me in the same capacity, I assume we paid approx. the same income tax (maybe 3-4K) last year.

She is getting a return of $8000.

Why?

I mean I'm glad she is getting money- god knows she works hard, but this is a TAX RETURN not an entitlement program... WTF