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Jacy
Jacy, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 568
Experience:  Nine years individual income tax preparation and consulting
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I am recently divorced by as of Jan 1 2010 am currently make

Customer Question

I am recently divorced by as of Jan 1 2010 am currently make 35000 a year in salary. I receive 5500 a month in child support for (3) @ 24000 a year in alimony adjustable with child support. I will continue to receive $2000 a month unless I remarry through my life or his death.

I have just recieved the ESP savings through QDROs 100% @appx 82000 which has to be rolled over into an IRA within 90 days. I will also receive 50% of pension which is valued at I'm guessing @ $20000. Social Security at 65 on his is 2400 a month.

I had to refinance my home into my name which took place June 10, 2010. Value $310,000 and refinance was for $200,000.

I have been told that if I need to withdraw any amounts of the 82000 - I need to do this now and would not be subject to the 10% penalty as long as I do this before I roll this 401K savings over into the traditional IRA. Of course I would be taxed on what I withdraw. I am awaiting specifics on the pension in the next couple of days to determine how much I will have available and am trying to figure out what my monthly income will be if I retire between the ages of 55-65.

My more urgent question is how much additional tax would I have to pay this year if I were to go ahead and withdraw 10 or 20K from this savings before rolling it over and is it feasible or how would it affect my retirement? I could really use the extra money - but don't want to put myself in a bind for taxes if it is too much. I also receive 50% of his bonus each year for the next five years which is variable. The smallest amount would estimated at $7,500 of which I will never be responsible for claiming on taxes.

I do not have any savings and would like to use part of this as college tuition for a child or to help with other expenses including paying down $10000 debt in credit cards.

I am claiming single with 3 dependents however I have 5 children living in the home currently one in college now and one starting college next year. I plan to pay $4000 in college tuition in this year.

I need some really good advice?
Submitted: 4 years ago.
Category: Tax
Expert:  Jacy replied 4 years ago.

Hello,

 

I will address tax on the ESP savings withdrawal first. First, assuming your taxable income this year is $60,000 (salary + alimony + misc), and you are taking 6 exemptions, and your itemized deductions are around 13,000 (rough guess on my part), then you will be in the 15% tax bracket. So, if you take out 10 to 20 thousand, the tax will be $1,500 to $3,000. If you take out more, you may be in the 25% bracket for that amount.

 

Your question regarding how this withdrawal will effect your retirement is difficult to answer. Financial advisers usually do not recommend early distributions unless it is a dire financial situation. This money can grow tax free in a IRA and may be needed when you retire. You did not say your age or how close you are to retirement so that is the extent of my advise on that subject.

 

You also did not say when you will be receiving your ex's pension and social security. I also am not sure how you can receive 50% of his bonus tax free.

 

The good news is that you may qualify for a tax credit of up to $2,500 on the college tuition you are paying this year.

 

I'm sure I haven't answered all of you questions, but hope we're off to a good start.

 

I hope this has been helpful to you.

 

 

 

Customer: replied 4 years ago.
Sorry,
My age is 51 DOB 9/22/59.

I do not understand 6 exemptions. (I assume you are referring to 5 children and myself?) I don't understand exemptions at all. Please explain.

My current plan is to leave all savings, pension untouched for a minimum of 5 years and more likely 10 if I can unless circumstances call for it. But... I would still like to withdraw 10-20 out of this savings if I could now without a major impact.

What would be the difference in between what I will have paid at the EOY and how much additional taxes I would have to pay out of pocket for 2010 if I took out 10 or 20K from this savings? Please be as specific as possible on the different amounts.

My desire would be to bring home 5-6K a month at retirement of between 60-65 or at an earlier age if feasible. Not to sure about that and not really sure how much I really need.

My calculations were that I would be in the 25% bracket at $59,000 or a little higher if I take out any of this money from the savings before rollover.

I would need to understand detailed specifics on how you calculate these amounts.
Understanding how all this is calculated or figureed is very important to me.

Thanks for helping.


Expert:  Jacy replied 4 years ago.

Hello,

 

The number of exemptions you claim is based on how many dependents you have on your tax return. If you are claiming all five kids and yourself this is six. You get to deduction 6 x $3,650 from your gross income AND your itemized deductions to arrive at your taxable income (unless of course your ex-husband gets to claim some of them).

 

Your tax bracket is based on your taxable income, which is Gross income less exemptions and deductions. This is why you are in the 15% bracket. If you are not claiming all the kids as dependents, then it is possible some or all of the ESP funds will be taxed at 25%. Without more specific information from you on your itemized deductions and exemptions, I cannot be more specific.

 

Also, you will need to make sure your tax withholding on your salary is enough to cover the alimony income. I can help with this if you can tell me what your Year to Date earnings and federal taxes withheld are so far and the date of your last check.

 

Thanks!

 

 

Customer: replied 4 years ago.
If I understand correctly I can claim my two older children age 20 and 23 as exemptions in addition to our three younger children. (The two older/ one attending local college and the other working part time - both living at home.) File 6 total exemptions on tax return for 2010? Do child tax credits apply?

Should I consider or am I eligible to file Head of Household and would that be to my advantage on the tax return 2010? The refinance took place in June. It is stated in the settlement that he will not file Head of Household after the year 2009. Most of the information I have been able to find says I should file single on this year's return. On my paycheck I file single/3. Am I obligated to file single/3 on my tax return 2010?

YTD Payroll ending 9/25 - Deposited on 10/1
Gross Earnings 26,912.00
Net Earnings 22,201.82
State 931.37
Federal 1570.41
SS 1658.40
Medicare 388.00
Misc. Insurance 162.00

Expert:  Jacy replied 4 years ago.

Hello again,

 

First, regarding the exemptions for the kids. It is very unusual in a divorce for one parent to take all of the exemptions. Usually they are split or the parents alternate every other year. Also, the child tax credit of $1,000 only applies to kids 16 or under at the end of the year (2010).

 

If you claim all of the kids, then your taxable income for 2010 will be around $25000 and the tax on that is $3331.

 

If you take out $10,000 from the ESP, your tax goes up to $5000. If you take $20,000, the tax goes up to $7,500.

 

So, if you have 3 kids 16 or under that you claim, you will have credits of:

 

Child tax credit 3,000

American Opportunity Credit 2,500

Federal tax withheld 2,093

 

Total credit 7,593

 

These amounts also assume you have itemized deductions of $13,000. This includes mortgage interest, state taxes paid in, real estate tax, and charity. Please let me know if this number is XXXXX close to your actual expenses.

 

To address the filing status issue, you may file as Head of Household, however this only matters if you are taking the standard deduction (vs. itemizing).

 

Regarding your W-4 status of single/3, this is for your employer to calculate your taxes and does not obligate you to that on your Form 1040.

 

To sum it up, if my assumptions are in the ball park, you will not owe any additional taxes (federal) on April 15 even if you take the $20,000 from the ESP. If not, let me know what you want me to change and I will recalculate.

 

Thanks!

 

 

Customer: replied 4 years ago.
I think I am beginning to follow you for the most part. Unusual as it may sound - it is stated in the settlement that "For the year 2009 only, (he) shall be allowed to claim the mortgage deduction and all other allowable deductions on the residence for tax purposes. Thereafter, (I) shall recieve all deductions associated with the residence."
I assume this to mean that I can claim all 5 children. Correct?

As for the itemized deductions (I am unknowledgable about how this works) but is this where I can use count college tuition for the 2010 year of at least $4,000 I have paid for my daughter? Is there a cap on those expenses that can be claimed? I assume I need to research both the 2010 (Jan-June) for the mortgage interest, state taxes and real estate tax prior to refinancing as well as (June-YTD)?
Expert:  Jacy replied 4 years ago.

Hi,

 

No, the kids are not included as deductions associated with the residence. The deductions for the residence are the mortgage interest and the real estate tax. You need to find the part of the divorce agreement that pertains to Dependents. It should say somewhere which one of you gets to claim which kids as dependents. When there are multiple children, it it usually split. If it is split, this will totally change the estimate I gave you.

 

The tuition you have paid is also not included as an itemized deduction. There are different tax benefits related to education. I need to know if you are claiming the dependency of the kids in college to elaborate. In my previous answer, I gave you the American Opportunity Credit for the tuition you paid. Sorry, I did not make that clear. We can get much more precise once you tell me which kids you get to claim as dependents and their ages.

 

Hope you can find this information on the kids. It is very important.

Customer: replied 4 years ago.
I can't tell you how much I appreciate this information - you are really helping!
I quote from the papers
"Tax Dependency - For the tax year 2009, only, the parties shall file jointly and equally divide any refunds. Defendant (he) shall be responsible for any taxes owed. Thereafter beginning with the tax year 2010, Plantiff (I) shall have the sole right to claim the minor children.
(Minor children being the 14, 15, and just turned 18 year old). There is no mention of our other two older children at all in the settlement.

Where is the best source for finding out the mortgage interest, sales tax and real estate taxes? Do I need two separate set of figures - one for Jan-June before I refinanced it into my name and another set for June - to date since refinancing?
Expert:  Jacy replied 4 years ago.

Great! That clears things up. Regarding the college kids, you can claim them as dependents if they are under 24 AND you provide more than half of their support. Support includes room, board, clothing, school costs, transportation, etc. Since they are living with you, it's probable that you can claim them unless they make a lot of money at their part time jobs.

 

To find out how much you have paid in mortgage interest and real estate tax, check your monthly statements. If you don't have them, you can call your mortgage company. Since you refinanced, you may have to call two mortgage companies unless you stayed with the original bank. You will probably need to add the figures together. I estimated $8000 in mortgage interest which is $200,000 x 4%. If you know your interest rate, you could estimate also.

 

For state income tax, you can use the amount they have taken out of your payroll check.

 

So, if your figures are similar to mine, you may owe some tax ($1,000) in April depending on how much ESP you decide to take.

 

Let me know if your deductions are a lot higher or lower than my estimate of $13,000 and I will recalculate again!

 

 

Customer: replied 4 years ago.
Ok I have located the following information. Pretty good estimation from mortgage company which was same as before. Real estate taxes are 3353.21 for one year. Mortgage interest from Jan-June was 5833.68 and so far Aug/Sept not including October yet $1665.65. My new refinance rate is 5% - was 6% prior to refinance. I included the state taxes from my pay stub YTD in a previous email. I think this is close to what you have.

Based on all this information If I withdraw 10 or 20K from this savings - how much would you figure I will owe in taxes again just to be clear. I have no idea how much money I would need to live off when I'm 65+ but can estimate at least 4,500 a month between SS and Alimony (unlikely to remarry) and that does not count the pension or this 401Ksavings (soon to be IRA) at retirement age. If I took out 20K from it now before rolling this over it would leave appx 62K in it that I wouldn't want to touch unless it was an absolute dire emergency - and possibly not touch it at all and leave it for my children. In your opinion does this sound like a wise plan?
Expert:  Jacy replied 4 years ago.

Hello,

 

Good. It sounds like you will have around $15,000 in itemized deductions. So, if you take $20,000 out of the 401k, your total federal income tax for the year will be $5,856. Since you will have $6,593 in credits and tax withheld, you should get a refund of $737. Keep in mind this assumes your college expenses qualify for the $2,500 credit.

 

Whether or not taking money out of a retirement savings is wise depends on you. If you will pay off your high interest credit card debt and can trust your self not to do that again, then it sounds like a good idea. Once this money goes into an IRA, you cannot get to it without penalty until you are 59 1/2 . There is an exception to the penalty if you pay for qualified education expenses, so you may be able to access this money for that reason.

 

Since I am not a financial planner or a retirement planner, I must advise you to consult with someone who is regarding your income needs at retirement.

 

I hope this has been helpful to you.

 

 

Jacy, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 568
Experience: Nine years individual income tax preparation and consulting
Jacy and 9 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thanks Jayce,

I can't begin to thank you enough for scratching the surface of all these complex details. I know we covered alot and I feel I have gained some valuable knowledge concering how to deal with all of this and now I can make more informed decisions for not only my upcoming taxes, but future decisions concerning my retirement based on this information. It would have taken me weeks to research all this and I really feel you have helped me in a big way.

Best Wishes!
J
Expert:  Jacy replied 4 years ago.

Thank you for your kind words. I wish I could do more. Please consider asking the finance experts your question regarding retirement planning.

 

I'm happy to follow up with you any time. Just hit Reply.

 

Good Luck!

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Jacy
Jacy
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Nine years individual income tax preparation and consulting