So my total tax liability will be 45% on pension early withdrawl?

Question

I made over $70K in 2005 in the 25% tax bracket.

On the form 1099 form, they've already taken out

1910.18 = 9,550.91 (gross amount) * 20%

On top of that, I have to pay an additional 25% on the 9,550.91

Is this about right?

Answer 1

Mike, I think you are obsessing for no reason.

On your original tax return, you were supposed to put down your wages ($70,000) *and* put down the amount you took out of the retirement plan ($9551). This was your total income and would have been used to calculate the total tax bill. Then, after calculating your tax, you were hit with a 10% penalty ($955).

If you were in the 25% tax bracket, the impact of withdrawing $9550.91 would be 35%, of which you already had 20% withheld, so you owe the other 15%.

The CP2000 letter should be asking for the 15% and the interest since you filed. No 1040x should be necessary. If the tax bill is around $1500-$1700 bucks, just pay it.

Joe using $70,000 as wages and a 1040A, here's what you would see different:

Original return, total income 70,000
Less standard deduction, personal exemption.
Taxable income $61,800
Tax $12121

Revised income, $7995
Taxable income, 71,351
Income Tax 14509
10% penalty 955
Total tax bill 15,464

Increase in tax 3343. (35% of $9551)
Increase in payments $1910 (20% of $9551)
Still need to pay $1433
plus interest and penalties since 4/15/2006

this math holds until the taxable income goes above $71950 because that's when the 25% bracket ends and the 28% bracket begins. Eg, if you made more than $70,600 in wages, the bill will be higher.

What I've put above is a tantamount to a dummy 1040x--the CP2000 already did the math for you, but I don't think you are understanding that the CP2000 is correct and does include the withholding.

Answer 2

No. In the 25% tax bracket you'll pay 25% income tax, plus the 10% penalty, total 35%. It might be a little higher if the withdrawal takes you a little into the next bracket of 28% for part of it.

The 20% already taken out will be applied to the 35% or so tax that you owe.

But in an earlier question you said this was from 2005, so you'll have penalties and interest added to whatever you owe.

Answer 3

you would owe 35% total including penalty - they have already withheld 20%, so you will only owe the remaining 15% tax

Answer 4

You will pay at your highest marginal rate plus 10% plus state tax.

Maybe you should reconsider what you are doing.