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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3345
Experience:  15+ years tax preparation and tax advice.
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I received a large monetary award this year ($300,000) in addition

Customer Question

I received a large monetary award this year ($300,000) in addition to five months of wages and 5 months of unemployment and I'm wondering if this amount of income subjects me to the Alternative Minimum Tax or any underpayment penalties. If so, would making a tax payment today help?
Submitted: 1 year ago.
Category: Tax
Expert:  Wendy Reed replied 1 year ago.
Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.

Hello there,

Presuming that your monetary award is entirely taxable, it is possible that you will be subject to the AMT. However, as you may be aware, Congress is currently (right this very minute) haggling over the "fiscal cliff" and the AMT patch---so to give you an estimate right now would truly be an estimate....based on supposed rates.

Without knowing the other amounts of your income, (such as wages and unemployment) I can't give you an exact amount. I also do not know if you have specific deductions like dependents, mortgage interest, property taxes, etc.

However, Presuming that you are single, taking the standard deduction, having taxable "award" income of 300K, and salary + unemployment of 30K, you would have a tax liability of approximately 95K. (approx $4500 of this is AMT) You can subtract from this whatever federal tax was already withheld from your wages/unemployment to figure out the estimated tax due.

As far as making a tax payment, our tax system is considered a pay as you go, and whether or not you need to make an estimated tax payment depends on multiple factors. If you received the award money in the last quarter of the year, you should make an estimated payment (of the full amount of tax estimated) by January 15th of 2013. If you received the award money earlier in the year, then a payment now will not negate the interest already accrued, as estimated tax payments are due quarterly.

There are some instances when you are not penalized for not making an estimated tax payment, such as if you had no income last year, or you paid 100% of your last year's tax due through withholding this year.

See here for more information on est. tax payments:
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes

Please let me know if I can assist you further.
Customer: replied 1 year ago.
Hi, thank you for the speedy reply.

Yes, that entire 300k is taxable - 250k was allocated as 1099 income and 50k as W2 income. 16,420 in federal taxes was withheld from the 50k. I made 41,868 in wages and 5,420 was withheld from that. I collected 13,857 in unemployment benefits and (1,364 was withheld in state taxes only). I also had a 15,000 401k loan that I was unable to repay when I was laid off so that is considered an early withdrawl.

I am single, head of household with two dependents.

As far as deductions I don't have a mortgage but I do have child care expenses which were around... 3,300
donations to my church...30,000
ira contribution...5,000
goodwill donations...1,000
and my atty's fee on that award which she says I can deduct - her fee was 86,670 (81,000 + 5,670 gross receipts tax)

I'm not sure how to calculate the estimated tax due. With the information I provided can you help me do this?

Additionally, if it looks like I owe a significant amount in taxes is there something I could do today that would help? For example, if donating more money to a charity would help I'd rather do that than give more money to the IRS.

Thanks for your help!
Expert:  Wendy Reed replied 1 year ago.
Hello again.

In order to give you a better estimate, I need to know what exactly the 250K is for, and if you could tell me how much state taxes were withheld for your W2 income.

What the 250K represents will determine how it is taxable (if it is payment for services, it will be subject to social security/medicare tax) and where the attorney fees are deductible.

For example, if it is payment relating to an employment related discrimination case, the attorney fees can be deducted beforefiguring out tax rate (above the line) and this deduction can be somewhat protected by the AMT, whereas if it is not a discrimination related claim, unfortunately the deduction of legal fees will offer little help since the deduction is rendered potentially useless when AMT kicks in. Believe it or not, some persons who have won large settlement have acutally wound up LOSING money after attorney fees and taxes.

As far as charity, that is a potential to help you pay less tax, as charitable contributions are still allowed for AMT calculation. Remember though, you are not receiving a reduction of tax $1 for $1----you will only receive a percent reduction. For example, right now you are in a tax bracket of approximately 33%. So if you give your church 10K, that will potentially reduce your taxes by 3300. So you will still be giving up an extra $6700.

Once I have the additional information, I will do another calculation.
Customer: replied 1 year ago.
The 250k was for a wrongful termination and in my attys explanation to me she said her fee was deductible because the claim was asserted under a covered discrimination law.



Customer: replied 1 year ago.
oops, i left out the answer to your state tax question. Sorry.

The state taxes paid on the 50k was 2,413.
The amount paid on my wages was 1,266.
Expert:  Wendy Reed replied 1 year ago.
Thank you so much for the additional information.

Presuming that your 250K settlement is a "covered" claim under the discrimination statute, your attorney fees may be deducted "above the line" which will drastically reduce your taxable income.

My estimate for federal tax liability with this additional information is 69200, and since you had over 21K withheld, you should owe approx $47400.

Please let me know if there is anyting else I can help you with.
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3345
Experience: 15+ years tax preparation and tax advice.
Wendy Reed and 6 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Hi Wendy, can you provide me with a breakdown of how you came up with those numbers?


 


Thank you

Expert:  Wendy Reed replied 1 year ago.
Sure, I can do that, but it will take a little bit. I also am going to do a revised estimate since the legislation was enacted after I answered this. Please give me a few hours, thanks!
Expert:  Wendy Reed replied 1 year ago.

This is still a rough estimate, and AMT may be slightly different (however this is only a small % of the overall tax)

Adjusted gross income:

284055 (W2 earnings, unemployment, 401k, plus 250K minus lawyer fees)

Itemized deductions:

34777 (charity plus state income taxes)

Exemptions for 3 persons

11400

Taxable income

237,878

Regular Tax

59573

AMT

3453

10% penalty tax on 401k distribution

1500

Total tax

64526

Credit for child care:

660

Credit for withholding:

21840

Balance of tax due

42026

Customer: replied 1 year ago.

thanks Wendy

Expert:  Wendy Reed replied 1 year ago.
You are very welcome, good luck!!

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