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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.
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.
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.
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.
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!
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.
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.