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10-14-2008, 02:34 PM
| | Junior Member | | Join Date: Aug 2005
Posts: 23
| | | financial stupidity
What is the name of your state (only U.S. law)? Illinois
Bad news!
My relative rolled over her +/- $200,000 from 401k into a retirement account only a year ago, she is 62, and blew through it all already!!!
Will she have to pay taxes on it come April?
We found out about this when her daughter asked for help because she was losing her house to forclosure after 5 year ownership when the ARM re-set, she since walked away from the mortgage.
Will the daughter have tax responsibility for loan "forgiveness", capital gains, etc?
The family is trying to help and my task is to ask the tax questions.
Thank you. |
10-14-2008, 02:36 PM
| | Senior Member | | Join Date: Aug 2005 Location: St. Odo of Cluny Parish
Posts: 28,211
| | | Q: Will the daughter have tax responsibility for loan "forgiveness", capital gains, etc?
A: Why would the daughter be responsible? Explain that.
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10-14-2008, 03:00 PM
| | Junior Member | | Join Date: Aug 2005
Posts: 23
| | | financial stupidity
sorry, I did not make my questions clear.
I am asking 2 unrelated questions:
the mother is the one who one year of retiring and rolling her 401k into a Vanguard retirement account withdrew and spent her whole retirement!
the daughter - once the ARM mortgage reset on the daughter's own house, the daughter than couldn't pay the higher monthly payment, even with the 2nd job she got.
so when the daughter asked her mom to help, the mom came clean as to what horrible thing she did and why she can't help. |
10-14-2008, 03:04 PM
| | Senior Member | | Join Date: Aug 2005 Location: St. Odo of Cluny Parish
Posts: 28,211
| | Quote:
Originally Posted by luxury_inc  sorry, I did not make my questions clear.
I am asking 2 unrelated questions:
the mother is the one who one year of retiring and rolling her 401k into a Vanguard retirement account withdrew and spent her whole retirement!
the daughter - once the ARM mortgage reset on the daughter's own house, the daughter than couldn't pay the higher monthly payment, even with the 2nd job she got.
so when the daughter asked her mom to help, the mom came clean as to what horrible thing she did and why she can't help. | Q: We found out about this when her daughter asked for help because she was losing her house to forclosure after 5 year ownership when the ARM re-set, she since walked away from the mortgage. Will the daughter have tax responsibility for loan "forgiveness", capital gains, etc?
A: Is the house foreclosed? What loan was forgiven? What real estate was sold?
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There are two rules for success:
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10-14-2008, 03:17 PM
| | Senior Member | | Join Date: May 2004
Posts: 33,540
| | Quote:
Originally Posted by luxury_inc What is the name of your state (only U.S. law)? Illinois
Bad news!
My relative rolled over her +/- $200,000 from 401k into a retirement account only a year ago, she is 62, and blew through it all already!!!
Will she have to pay taxes on it come April?
We found out about this when her daughter asked for help because she was losing her house to forclosure after 5 year ownership when the ARM re-set, she since walked away from the mortgage.
Will the daughter have tax responsibility for loan "forgiveness", capital gains, etc?
The family is trying to help and my task is to ask the tax questions.
Thank you. | If your relative has spent her entire 200,000 retirement savings in a one year period, then yes, she is going to have to pay regular income tax on the 200,000. If she didn't have any withholding taken out when she received her distributions, she may be in a world of hurt. If only the standard 10% was withheld, then she will still be in a world of hurt.
The daughter will receive a 1099A and possibly a 1099C on the mortgage. Due to the mortgage debt forgiveness relief act of 2007, she may not have to pay any tax on the cancelled debt. She should absolutely go to a tax professional for 2008. She should not attempt to do this particular return on her own.
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in vino veritas |
10-14-2008, 05:17 PM
| | Junior Member | | Join Date: Aug 2005
Posts: 23
| | | financial stupidity
in vino veritas - if only! if nly they had a glass of wine once in a while they might have seen the truth while they still could do something to help themselves!
Thank you for being so generous in sharing your knowledge.
I have a question regarding the daughter: does the debt forgiveness apply to cash-out refinance that exceeds the original mortgage amount? she refinanced about 2 years ago.
Seems that ther is no hlp for the mother, I don't suppose that Vanguard was deducting taxes each time she took a chunk of money out,she probably just wrote checks.....I am worried about her health |
10-14-2008, 05:40 PM
| | Senior Member | | Join Date: May 2004
Posts: 33,540
| | Quote:
Originally Posted by luxury_inc in vino veritas - if only! if nly they had a glass of wine once in a while they might have seen the truth while they still could do something to help themselves!
Thank you for being so generous in sharing your knowledge.
I have a question regarding the daughter: does the debt forgiveness apply to cash-out refinance that exceeds the original mortgage amount? she refinanced about 2 years ago.
Seems that ther is no hlp for the mother, I don't suppose that Vanguard was deducting taxes each time she took a chunk of money out,she probably just wrote checks.....I am worried about her health | She may have some capital gain as a result of the cash out refinance, but that can be excluded as it was her primary residence as long as the capital gain was not more than 250k. (a foreclosure counts as a sale)
The rest depends on the nitty gritty details, and that is where a tax professional, who can review everything, will be useful.
However, for the most part, she probably is not going to have to pay any tax on the cancelled debt.
You are right, there is really no help for the mother. However, if the money was in a qualified retirement plan, then most likely at least 10% in tax would have been withheld. The problem is, that with 200k in one year, 10% isn't going to even remotely cut it.
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10-14-2008, 10:26 PM
| | Member | | Join Date: Feb 2006
Posts: 108
| | | cash out refinance
Debt relief in connection with a cash out refinance may not be excluded from taxable income under the new mortgage tax relief act. However, the daughter may be able to exclude cancellation of indebtedness income under the insolvency exclusion (to the extent she was insolvent at the time of the foreclosure). |
10-14-2008, 11:10 PM
| | Junior Member | | Join Date: Aug 2005
Posts: 23
| | | financial stupidity
HI mt,
So your interpertation is that once she refinanced and took some cash out - her situation is excluded from the new tax relief act?
She is gainfully employed, healthy and in her early 30's, she might have enough savings to tie her over for 2 or 3 months, would she qualify for the insolvency exclusion?
By the way, we are talking about a small Chicago suburb condo, nowhere near 250k. |
10-15-2008, 12:05 AM
| | Member | | Join Date: Nov 2007
Posts: 219
| | Quote:
Originally Posted by luxury_inc HI mt,
So your interpertation is that once she refinanced and took some cash out - her situation is excluded from the new tax relief act? | It's not. Quote:
She is gainfully employed, healthy and in her early 30's, she might have enough savings to tie her over for 2 or 3 months, would she qualify for the insolvency exclusion?
By the way, we are talking about a small Chicago suburb condo, nowhere near 250k.
| Insolvency has nothing to do with anything you just mentioned. Mtpockets got it right. |
10-15-2008, 07:39 AM
| | Senior Member | | Join Date: May 2004
Posts: 33,540
| | Quote:
Originally Posted by luxury_inc HI mt,
So your interpertation is that once she refinanced and took some cash out - her situation is excluded from the new tax relief act?
She is gainfully employed, healthy and in her early 30's, she might have enough savings to tie her over for 2 or 3 months, would she qualify for the insolvency exclusion?
By the way, we are talking about a small Chicago suburb condo, nowhere near 250k. | Insolvency:
If just before the cancellation of debt happened (the foreclosure) her debts exceeded her assets, then she was insolvent to the amount that her debts exceeded her assets.
She needs to consult a good, local tax professional who can review all of the details of her situation. What she did with the cash that she got from the refinance factors into the situation, and there is some disagreement here regarding the mortgage debt forgiveness relief act.
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10-15-2008, 11:42 PM
| | Junior Member | | Join Date: Aug 2005
Posts: 23
| | | financial stupidity
Hi LdiJ,
Yes, looks like aside from the ruined credit score, the daughter will have no further consequences. Even if she doesn't qualify for the mortgage debt forgiveness act, the small amount of capital gain realised will be excluded. I doubt if the bank will expend the money and resources to go after "a dead beat" even if she squandered the refinance money rather than spending it on improvements - good question though, where did it go!
Hope the mother doesn't lose her own house when the IRS puts a lien against it for income taxes!
What a mess. I'll follow your advice and provide them with a most experienced tax professional I can.
Thank you for your kidness and your unpretentiousness which obviously comes from confidence. | |
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