I took an early pension payout when I left my job after 11 years. Instead of reinvesting the money I used it to pay off all my bills except my vehicle, i.e. credit cards, late doctor/hospital bills, etc. I paid state and federal taxes on the money before it was ever given to me, and I paid a penalty for early withdrawal. On my taxes the next year, the sum I was actually paid was added to my taxable income, throwing me into a higher tax bracket as a single person and now I owe the IRS big time. I am confused as to how this is not taxing the same money twice. I added up the total tax on the pension money and if correct my portion of that money that I worked for would have ended up being $1,500.00 (the pension was only $23,600.00 and I ended up with a little over $16,000.00 when they took the first set of taxes out). I had a certified account do my taxes for me but I think there must be a mistake somewhere. Can anyone shed some light on this for me?
Anonymous2009-03-08T10:49:44Z
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You know how when you get your paycheck, there are taxes withheld? And how when you file your taxes at the end of the year, you either have a refund or owe because the money was just a guestimate of what your actually tax liability would be?
The early payout works the same way. The money withheld was merely withholding. Invariably they only withhold 10% for income tax and if you take out a lot, or have other income, it's woefully inadequate.
You paid SOME of the tax when you received the money. You must still pay the rest. When you filed (if the accountant did it correctly), you received credit for the tax that you already paid and most pay ONLY the remaining portion. You are not being taxed again. The total tax, both what was paid already and what must still be paid, is ONLY the tax and penalty computed when filing, not the sum of that plus the amount earlier.
You are correct that the full pension amount gets added to your taxable income in the year you took the money.
The taxes you owe is based on your total income + pension minus what you already paid from your weekly salary plus any taxes that were taken out of the pension money.
The $23,600 plus your salary for the year is what your tax bracket is based on. You are not being taxed twice on the money. It's just that the more you earn, the more you owe.
When you take retirement before the age of 59.5, the government takes 20%. you are require to pay the other 10% penalty tax on the total payout before taxation. Example ;You were told you were entitle to a pension pay of $28,000. The government therefore takes the $ $28,000 mius 20% equaling $5,600; that s what they take. Now you are required to pay $2,800 even though you only received $22,400 after their deduction. This deduction is done on a 5329 form. Later, you then is show this 5329 filing with your federal and 1040 state tax. For your city tax, you attach a 1099R form as pensions are not taxed by your city. My advice to anyone is to file all necessary forms and pay all of you taxes (federal/state) out of you retirement check so it doesn t hurt you at tax time. Hope this is helpful.
I took a pension early two years ago. They automatically give you the "penalty" for cashing it out, and then they take a certain amount of taxes. It may not have been enough. I ended up owing another $2000 that year.