How do taxes/penalties calculate on a retirement loan that defaulted? Loan amount is $44k.Does the IRS add tax onto $44k and then I get a 10% penalty based on that total?

[Carl]

This has nothing to do with the amount borrowed. Only the unpaid balance you defaulted on. The unpaid balance on the loan is withdrawn from the retirement account and used to pay off the loan. If you are under retirement age then it's an early withdrawal subject to taxes and penalties. THe amount withdrawn also adds to your AGI for the tax year in which the withdrawal occurred.

[fanfare]

The balance on the loan is considered a withdrawal and the loan disappears. The comment above makes it sound like you have to pay twice.

[caeloo1012]

Thanks for this. I guess I am just wondering what I will have to pay when I go to file my income taxes? Will I be told that I owe let's say 20% tax on the unpaid balance, 10% penalty of the unpaid balance, and then the taxes on my new AGI?

[fanfare]

you don't get taxed twice on the same distribution. There may be an early withdrawal penalty

[caeloo1012]

Thanks. So if the taxes are 12%, I would pay 12% on $45,000 plus the 10% penalty on $45,000 which would be a total of about $9,900? Is that right?

[VolvoGirl]

45,000 added to your income will push you into a higher tax bracket.  And might reduce or eliminate some credits you might otherwise be getting.  So you won’t know exactly until you do your return.  But you can pay like up to 50% of it for federal and state taxes and penalties.

[caeloo1012]

But I have already been paying income taxes on the rest of my income throughout the year... That is what is so confusing. Wouldn't I just pay the income tax on the outstanding loan amount which $45,000 and according to the 2018 IRS tax brackets, that is 12% when filing married/jointly. I do believe the penalty is 10% which would be $4,500. Sorry. This is all super confusing!

[VolvoGirl]

You have not been paying taxes during the year.  You have withholding taken out to cover the tax on your income.  Your tax liability is calculated on your total income.  The 45,000 is not just taxed by itself in the table.  It adds to your total income.  You have to look up the TOTAL INCOME in the tax table.  Or actually it’s your total income minus the Standard Deduction (or Itemized Deductions) to give you your taxable income.

[fanfare]

Of course you are paying income taxes throughout the year, That's how the system works,
And that's why 1040 has a line - Line 75 - for the "amount you overpaid",

[Anonymous]

federal taxes operat under a graduated tax system .  the higer the income, the higher the rate on the last $$$ of income so you would be adding $45,000 to your income.   say that your single and your 2017 taxable income was $20,000 before this $45k your tax would be about $2,500.  the tax rate on about the last $10,700 of the $20,000 is 15%.

but now your income is  $65,000.  the tax on that is about $12,000   the first $18K of the additional $45K is taxed at 15% and the balance of $27k is taxed at 25% 

in addition you'll owe $4,500 for the early withdrawal penalty.  total $16,500

you could look at it as the $45K costing you an additional $14k in taxes

if for 2018, regular taxes of about $10,200 + the $4,500 penalty for a total of $14,700.  top tax bracket 22%