Tax Debt Help - "Why We Do The Things We Do"

Doing taxes year round gives me the opportunity to see just what kind of situations most folks put themselves into by not filing timely.

One of the most common reasons most folks won't file a return are those dreaded 1099s. Whether it is a 1099-Misc or a 1099-R.

The 1099-Misc is pretty straight-forward and easy to understand, there's been no tax taken out and 90% of the recipients haven't saved or made estimated payments. The biggest thing to worry about in this case is the self-employment tax, which is actually paying into your Social Security account. So in reality, you are just paying yourself.

Last but not least are those 1099-R withdrawals. The IRS wants folks to save for their retirement and they give you tax credits for doing so. But with the economy being such as it is and folks loosing their jobs, it's understandable that sometimes the only place to go for help out of debt is to cash in on those 401K or IRAs. This is where you can really get into trouble and accumulate a large amount of tax debt.

Number one, if you don't have federal and state withheld at the time of withdrawal then you have to account for that at filing.

Number two, the IRS imposes a 10% penalty for early withdrawal and that too can be sizable if you have made a partial or total withdrawal.

Let's look at a worse case scenario.

Say you withdraw only a portion of the balance.....$20,000. No tax is deducted at the time of withdrawal.

Come time to file here's what you can expect:

• You are looking at 15-25% tax rate depending on your bracket. This could be anywhere from $3,000 to 5,000 in tax on Federal alone.




• Now you've got to calculate the State tax. If your State has a rate of 7.5%, then your having to pay an additional $1,500.




• And to top it all off, you have to calculate the IRS 10% penalty of $2,000.

Now let me show you just how much of that $20,000 you are actually getting to help pay off those debts you need to pay.

• $20,000 Withdrawal amount


• - 5,000 Federal tax due @ 25% tax rate


• - 1,500 State tax due @ 7.5% rate


• - 2,000 10% penalty to the IRS

Of the $20,000 that you withdrew, you have lost 57.5% or $11,500 of your withdrawal after tax and penalty.

To compound the situation, if you fail to file a return for 3 years, then you're looking at a failure to file penalty along with interest accruing for that three year period. We won't even do the math on that one.

So is it really worth making that withdrawal when you're going to loose over 50% of what you've worked so hard to save. There are two things that you can be sure of....."death and taxes" and they both can be devastating.

Like I always say, "it's better to be proactive than reactive"!