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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3161
Experience:  I've prepared all types of taxes since 1987.
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recently cashed out pension fund before 59 years old. pension

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recently cashed out pension fund before 59 years old. pension fund lump sum amount approximately $44,000.00. employer took out the federal withholding 20% and the california state withholding giving a remaining balance of 33,000.00. how much penalty do i need to pay for federal and state? my 2012 wage is approximately $52,000.00 before federal and state taxes.

Greetings,

 

The penalty for early withdrawal is 10% of the amount that is taken out of the retirement plan and not put into another plan or IRA.

That is the gross distribution before taxes were withheld.

 

If the lump sum was $44,000 and you have no exception to the penalty then the penalty is 10% of that $44,000 amount that will be included in your income or $4,400.

 

Please know that the 20% is very often not enough withheld to pay the income tax plus the penalty. If the $44,000 of income is taxed at 15% and the penalty is 10% of that amount then a total of 25% of the $44K is the total due on that - not 20%>

If 20% or 8,800 was withheld and 25% or 11,000 is the actual total tax plus penalty then the balance will result in a lesser refund than in prior years or possibly a balance of tax due when you file.

 

Please ask if you need more discussion or clarification.

Thank you.

 

 

Customer: replied 3 years ago.

will i need to show the employer's tax withholding from my lump sum amount on my taxes or does this mean i lose the tax withholding amount and pay the penalty + tax on total amount between my wage + lump sum amount?


 

Hello again,

 

Similar to the W-2 that has your income and withholding from wages you will gat a 1099-R that the income and withholding from the lump sum.

 

The withholding from the pension will be added to the withholding from your wages and show up as part of the payments you have made toward your total tax as figured on the return.

 

Just like when you only had wages (and no pension) you show the income, figure your tax after deductions and credits and then compare that tax to your withholding to see if you had more than enough withheld and get a refund or too little withheld and pay in .


In the same way, next year you will show your income (both wages and lump sum pension withdrawn), figure your tax after deductions and credits and then compare that tax to your withholding (from both wages and lump sum) to see if you had more than enough withheld and get a refund or too little withheld and pay in.

 

You do not lose the withholding, but I wanted to warn you that on the lump sum that 20% withheld it is very often less than the 25% of tax that will be part of tax you figure and so this year you will have a smaller refund or even a balance due as compared to last year.

 

Hope that clarifies for you; but please ask if you need more help.

Thank you.

Customer: replied 3 years ago.

I figured I would have to pay half from the lump-sum amount for federal and state tax with penalty. Plus my wage for this year's tax. will that cover the tax situation?

Hello again,

 

Since federal will be about 25% and California a bit less than 10% a good estimate of the total tax from both is 35% of the 44,000 or about 15,400.

 

So, yes, about half of the 33,000 net or 16,500 should be enough to cover the tax.

(presuming that not much changed on your withholding from your wages and income tax on everything else).

 

Hope that clarifies for you.

Thank you for the opportunity to be of service.

 

 

 

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