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billyandwilla
Returning Member

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?

457b company has kept 20% for taxes.Looking for hot to NOT get penalized
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10 Replies

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?


@billyandwilla wrote:
457b company has kept 20% for taxes.Looking for hot to NOT get penalized

20% is the mandatory withholding.  The actual tax when you file depends on your other income and the tax bracket you are in.   If you are under age 59 1/2 then there is an additional 10% penalty.

 

For example, if for  2021 your taxable income will be $40,526 to $86,375 you will  be in the 22% bracket and if under 59 1/2 then you should have at least 32% withheld to avoid more tax at filing time.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
billyandwilla
Returning Member

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?

Thank you for the reply!

 

Now that I can type more than 150 characters, I can be a little more specific.

 

I'm all good on the age penalty portion. (And I can attest to that every morning when I hear the snap-crackle-pop getting out of bed!)  

 

My wife and I will gross in the neighborhood of $478,000 in 2021.  This is SIGNIFICANTLY more than ever before due to taking money out of my 457(b) for a home remodel.

 

What gets subtracted from our gross?  (Property taxes, charitable contributions, child care, etc...)

And is that number our "adjusted gross income"?

If not, then what is my "agi"?

 

Is our tax bracket determined by our agi?  

 

Somewhere in the past, I was told that if one is "waaay" short on income tax via normal withholdings, there is a large penalty in addition to taxes due.

 

In addition to the 20% mandatory withholding, we're only taking out "normal" withholdings on our regular paychecks.  Is there anything else we can do to mitigate how much we owe come tax time?   

 

Is there indeed a penalty if I come up "waaay" short?

 

Thanks in advance for the help!

 

 

 

 

 

 

 

   

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?


@billyandwilla wrote:

Thank you for the reply!

 

Now that I can type more than 150 characters, I can be a little more specific.

 

I'm all good on the age penalty portion. (And I can attest to that every morning when I hear the snap-crackle-pop getting out of bed!)  

 

My wife and I will gross in the neighborhood of $478,000 in 2021.  This is SIGNIFICANTLY more than ever before due to taking money out of my 457(b) for a home remodel.

 

What gets subtracted from our gross?  (Property taxes, charitable contributions, child care, etc...)

And is that number our "adjusted gross income"?

If not, then what is my "agi"?

 

Is our tax bracket determined by our agi?  

 

Somewhere in the past, I was told that if one is "waaay" short on income tax via normal withholdings, there is a large penalty in addition to taxes due.

 

In addition to the 20% mandatory withholding, we're only taking out "normal" withholdings on our regular paychecks.  Is there anything else we can do to mitigate how much we owe come tax time?   

 

Is there indeed a penalty if I come up "waaay" short?

 

Thanks in advance for the help!

 

 

 

 

 

 

 

   


I would use the IRS withholding calculator 

https://www.irs.gov/individuals/tax-withholding-estimator

 

or the turbotax TaxCaster app (it may still be programmed for 2020 rules but the result will be similar to 2021TaxCaster tax calculator

 

or start a test return in Turbotax online (it's "free to start" and you only pay when you are ready to file, or start a test return in the desktop version of Turbotax for 2021 installed on your own computer.

 

You can be assessed a penalty for under-payment of withholding due to the lump sum that increases your income and tax owed.  To avoid a penalty, you need to pay into the system (via estimated payments or withholding) at least 110% of your tax liability from last year.  That's form 1040 line 24.  Remember that your tax liability is the overall amount you paid to the IRS last year.  If you had $10,000 of withholding and got a $1000 refund, your liability was $9000.  Likewise if you paid $8000 via withholding and owed another $1000, your tax liability was $9000.

 

You can make an estimated payment at www.irs.gov/payments, select 2021 Estimated Taxes from the reason menu.

 

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?


@billyandwilla wrote:

 

 

My wife and I will gross in the neighborhood of $478,000 in 2021.  This is SIGNIFICANTLY more than ever before due to taking money out of my 457(b) for a home remodel.

 

What gets subtracted from our gross?  (Property taxes, charitable contributions, child care, etc...)

And is that number our "adjusted gross income"?

If not, then what is my "agi"?

 

Is our tax bracket determined by our agi?  

 

Somewhere in the past, I was told that if one is "waaay" short on income tax via normal withholdings, there is a large penalty in addition to taxes due.

 

In addition to the 20% mandatory withholding, we're only taking out "normal" withholdings on our regular paychecks.  Is there anything else we can do to mitigate how much we owe come tax time?   

 

Is there indeed a penalty if I come up "waaay" short?

 


Simplified, either the standard $25,100 deduction is subtracted or you itemized deductions if higher is subtracted from, your AGI which is the total of all taxable income.    That becomes your taxable income that determines your tax bracket.

 

Guessing that you will be in the 35% tax bracket then you probably should have more withheld, (or pay estimated tax) to avoid an underpayment penalty if you end up owing $1000  more in tax. 

 

You might want to use TurboTax TaxCastor to get an estimate of your tax liability.

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?

As long as you have had withheld at least the amount of your tax from previous year, there will be no penalty for estimated taxes, despite any large jump in taxable income.

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?

@fanfare 

No, at their income level they must withhold or make estimated payments equal to 110% of last year.  

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?

@Opus 17 

OK, but not necessarily,

 Instructions for Form 2210 say if your prior year income (over $150,000) made you a higher income taxpayer, use 110%.

 

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?

@fanfare 

Read the taxpayer’s first follow up comment.  

billyandwilla
Returning Member

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?

A huge thanks to everybody for the suggestions, they have lowered my stress level significantly.  

 

If I include the mandatory 20%, we've easily paid 200-300% more in '21 than in previous years.

 

I may or may not pre-pay, simply to lesses what we take out in '22...still a couple weeks to decide on that.    

I'm retired police officer w/pension.Wife works full time.We've taken a large amount out of my 457b for home remodel.Looking for suggestions how to minimize what we owe?

@billyandwilla 

There’s one other thing that comes in to my mind.  You have 60 days from taking a distribution to return it without penalty. If you are past the 60 days, then there’s no point in reading any further. But if it is within the 60 days, you might consider returning some or all of the money and using a home equity loan to finance the remodeling.

 

You’re going to pay 35% federal tax on this income.  If you could get your taxable income under $165,000, you will only pay 24% income tax. (Taxable income is your gross income minus your standard deduction or your itemized deductions.)  suppose you withdrew enough money to make a down payment on the remodeling but keep your total taxable income under $165,000. Finance the rest of the remodeling with a home equity loan which might have an interest rate of 5 or 6%.  By leaving the rest of the investments in the retirement plan, you probably are earning more than 6% so you will come out ahead on the investment income.  Then, there is no reason to keep the equity loan for 15 or 30 years. You can pay it off in just a few  years by making future withdrawals from your retirement plan, keeping each year‘s withdrawal just large enough that your total income remains in the 24% tax bracket and does not go into the 32% or 35% tax bracket.  You would still have a debt-free house in a few years, and you would save maybe $30,000 in income tax.  Best of luck either way.

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