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As a tax preparer, I can tell you it is critical to always consider the tax implications of any financial move. Below you will find a list of the most common taxtime killers I encounter, and an explanation of the tax consequences with each action.....
Loan Modifications / Short Sales / Foreclosures
Any time a change is made that involves not paying back the full amount of your mortgage, tax consequences could result. Loan modifications that reduce the loan balance, short sales and foreclosures, all involve a “short payment” of the loan amount owed.
“You might find you have a new problem...having to pay taxes on the forgiven or cancelled debt!”
This shortage amount will likely need to be claimed as income on your tax returns. Therefore, while you are working to bail yourself out of the above problems, you might find you have a new problem...having to pay taxes on the forgiven or cancelled debt!
Early Withdrawal of Retirement Funds
Many people bail themselves out of tough financial times by taking an early withdrawal from their 401k, IRA, or Pension. This move is devastating as you pay federal and state taxes, plus a 10% penalty on the withdrawn amount. Because this “income” is also taxed at your highest marginal rate, it is not uncommon for the tax to exceed 50% of the withdrawn amount (33% federal, 10% state, 10% penalty)!
Taking on Independent Contract Work
This decision is often made with good intentions of earning more money “on the side”. However, it can be painful come tax time if you don’t know Uncle Sam’s plan for this income. You must properly account for federal and state taxes, along with the 15.3% self‐employment tax. There are several other concerns you should review before taking on “side jobs”.
Any financial move should involve your tax advisor. I give tax advice to my clients throughout the year so they can avoid the huge pitfalls mentioned above. Call or email me with your questions...I’m happy to help!!!