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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11821
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I was paying on a loan from my 403 but have recently been

Customer Question

I was paying on a loan from my 403 b but have recently been unemployed. I have only 40,000 to live on until I can find work again. The loan balance that I would default on is $6000. Is it better to pay down my savings by a $1000 this quarter or is it better to let the loan go into default and pay the penalty
JA: The accountant will know how to help. Is there anything else the accountant should be aware of?
Customer: I hope to have employment before years end. I have been unemployed since June, and have only about $500 a month from substitute teaching now. But it is hit or miss
Submitted: 7 months ago.
Category: Tax
Expert:  Lane replied 7 months ago.

Hi. My name's Lane. I can help here.

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This is a multi-factored issue. Given the uncertainly here, almost any answer could be right.

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But if you're fairly certain that you'll be employed by April of next year, when the additional tax will be due, this would certainly buy some time.

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The 6000 will be added to your income, so depending on the amount of income you end up making for the year, you could be taxed at anywhere from 15% to 25%, then another 10% if you're under age 59 and 1/2.

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Just to give you a feel, here are the tax brackets for a single filer (we'll start there, as this would be the most conservative estimate)

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Single Filing Status

[Tax Rate Schedule X, Internal Revenue Code section 1(c)]

  • 10% on taxable income from $0 to $9,075, plus
  • 15% on taxable income over $9,075 to $36,900, plus
  • 25% on taxable income over $36,900 to 89,350, plus
  • 28% on taxable income over $89,350 to $186,350, plus
  • 33% on taxable income over $186,350 to $405,100, plus
  • 35% on taxable income over $405,100 to $406,750, plus
  • 39.6% on taxable income over $406,750.

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and remember that this is TAXABLE income so you can add another personal exemption plus the standard deduction (6200 + 4050) before you'd hit the next bracket.

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So if you end up at under 46000 some of the 6000 would be at 15% but above that it's a 25%

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So worst case is (6000 x .25) + (6000 x .1) = 2100 added to the tax bill next april

Expert:  Lane replied 7 months ago.

Given the uncertainly, it might be better to have the bird in hand now (not pay down the savings).

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But this is where we get to art more than science ... you have to do what lets you sleep at night.

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Remember that it's not all or nothing (you could repay SOME) AND you can always pay in estimated taxes once you pick up the new job (or have extra withholding done) to cover some (or all of the additional tax)

Expert:  Lane replied 7 months ago.

I hope I've at least helped you work through it, and given you the parameters.

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Please let me know if you have ANY questions at ALL, before rating me.

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If this has helped, and you DON’T have other questions … I'd appreciate

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Thanks!

Lane

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I have a law degree, with electives in Tax Law, Estate law, Corporate law, and business planning … an MBA, with specialization in finance a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.