In 2011, we received a 401(K) account distribution of $104,815. Our total income for the year was roughly $175,000. We withheld $20,963 at the federal level and $5,241 for the state of Maine. However, we owed an additional $15,000 in federal taxes and $7,500 to the state. I do not understand why we still owe those amounts given that we withheld taxes? We are less than 59 1/2 years old.

ANSWER

The BIDaWIZ Team's Answer:

We calculated the likely taxes based on the information you provided. The federal tax amount due is correct. The confusion likely occurred when the trustee/custodian of the 401(k) told you that you must withhold 20% for federal taxes. That was just the minimum required amount to be withheld. Unfortunately, since you were in the 28% tax bracket at the time, the total taxes plus the 10% early withdrawal penalty translates to roughly $35,000 in total federal taxes due for the distribution. The $20,000 was just the minimum due at that time. They should have provided greater guidance and this is often the problem when trustee/custodians handle distributions. As for the state, the $5,241 also doesn't cover the full amount due. However, we believe the additional amount due is likely around $6K not the $7,500. It's possible though there may be other factors and penalties/interest that the State is assessing. We would need to dig deeper here and review the actual tax return. In terms of our recommendations, unfortunately there's not much for you to do as the taxes due appear to be largely accurate and you're already on a payment plan. Another option would be to seek the formal services of a CPA or Tax Attorney to work on trying to better negotiate with the IRS and to see if there are any opportunities to fix past returns. We have several professionals in our network that you can work with here if you want to explore that option.