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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
Satisfied Customers: 577
Experience:  10 years experience
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I made $94,000 this year and was off and they gave me a

Customer Question

I made $94,000 this year and was laid off and they gave me a severance of $42k plus I need to pay back $24k if I don't want to count that as income from a 401k loan. How can I avoid paying so much in taxes? I don't think the severance would even cover it. I did put money into the 401k and I can put some into an IRA, but if I pay back the $24k I don't think I would even have enough to pay what the FEDs want.
Submitted: 12 months ago.
Category: Tax
Expert:  emc011075 replied 12 months ago.

Hi. My name is ***** ***** I will be happy to help you.

First, if you don't want the 24K treated as distribution subject to income tax plus 10% penalty, you will have to pay it back. Loans from 401K strictly regulated and there's no way around it. Your severance pays are usually subject to 25% withholding rate so federal tax liability will be withheld from the paycheck. If you made contributions to your 401K, the amount will reduce your taxable income.

I need to get a better picture of your tax situation to help you. What's your filing status? Did you have any medical insurance through your employer or other pre tax deductions beside 401K?

Customer: replied 12 months ago.
I am over 55 so there is no 10% penalty according to Charles Schwab if I leave it with the firm's 401k plan since I was terminated and did not choose to leave. Federal was not withheld. I have about $3,000 in HSA expenses and 7,000 that went to 401k. I've already received the money and it is in a savings account. I made the mistake of signing the agreement too soon or I would have received the money next year. BIG MISTAKE.
Expert:  emc011075 replied 12 months ago.

If you are over 55, Charles Schwab is correct, there will be no penalty on the distribution (separation of service exemption apply here), but it will still be subject to income tax.

What do you mean with Federal was not withheld? Your severance pay should had been distributed through payroll. What's your filing status?

Expert:  emc011075 replied 12 months ago.

Did you make any contributions to HSA this year? HSA expenses will not make any difference. Also, 7K that went to 401K, was it a contribution or repayment of the loan?

Customer: replied 12 months ago.
I did not let them withhold federal taxes for the final checks.
Customer: replied 12 months ago.
I'm sorry, but I don't think you can help me:(
Expert:  emc011075 replied 12 months ago.

That's right. I cannot help you if you don't give me information I need to help you.

Customer: replied 12 months ago.
I did put $3,000 into the HSA and used the amount and the $7,000 was put into 401k not to repay loan. I also have a home business. I think it's too complicated for you to help me by email. I will need to meet with someone. I'm sorry. Thank you for your time.