Today TaxMama hears from Debra in Georgia with these problems. “I had almost no income in 2007 from losing my job. I had to live on withdrawals from my 401k. Due to the penalties I am still paying this debt to the IRS. My home was also foreclosed on in the same year. Could I have filed a capital loss on this to offset some of this? Can I file an amended return now that I might provide a little help?”
As if life isn’t tough enough…after losing your job and home – you still face penalties for using your own money.
I truly, truly wish that Congress would have included a waiver of penalties for unemployed folks withdrawing their retirement funds. Isn’t it enough that you’re paying taxes on them? What’s the point of the extra punishment? Kind of a kick me when I’m down concept.
Unfortunately, I have no good news for you. There are no capital loss deductions arising from losing your home or selling your home at a loss. In fact, it’s even possible that you might face income from cancellation of indebtedness. http://snurl.com/insolvent
However, you might be able to amend your prior returns to reduce your penalties for payments made to cover health insurance. Or perhaps some of the payments for medical expenses. Or one of the other exceptions to the penalty might apply to you. Read page 3 of the instructions to Form 5329. http://www.irs.gov/pub/irs-pdf/i5329.pdf
Since you sound pretty broke to me, why don’t you try to file for an offer in compromise? Unless you still have a lot of money in your 401(k) account, you might qualify to settle the debt for less. Download the Form 656 package and read the instructions. You just might qualify! http://www.irs.gov/pub/irs-pdf/f656.pdf
And remember, you can find answers to all kinds of questions about owing IRS and other tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- TaxMama’s MarketWatch Article :: Using Insolvency to avoid certain taxes
- Instructions to IRS Form 5329 :: Additional Taxes on Qualified Plans
- IRS Form 656 package :: Offer in Compromise Application