How to explain to client?

[JoshinNC]

I have one of those cases you get every couple years that just breaks your heart and am totally disturbed by having to tell this couple how much they owe. Here's the skinny:

Client's moved from NY to NC last year (referred by client's brother who is very successful client of mine) and took distribution from 401k to pay down payment on NC house. They took $171,000 out and had 20% tax withheld. Unfortunately, this distribution + SS payments + pension distribution + small W-2 puts them in the 33% tax bracket. And to make matters worse, the wife who owns the 401k is only 54, so they also owe a $17,000 penalty. So now their total tax bill is over $40,000, even after having $34,000 withheld from the distribution. The husband is on disability and the wife is working parttime at Toys R Us, so they definately don't have the money lying around. And, they would never be able to get an OIC because they have $190,000 equity in their new house. I know there's nothing I can do to reduce their bill, but am just terrified of calling this guy and letting him know what's going on (he literally might have a heart attack).

Should I give him the news over the phone or face to face (I agreed to go to their house to pick up everything for the return and planned on mailing it all back to them, but feel kinda bad about just calling and springing this on him). Maybe those of you with many years of wisdom can help to play tax pro and psychoanalyst on this one.

[Brian EA]

Go Easy

You have to tell like it is. Tell the wife first then slowly let the husband into it. Ask questions like ; what happens if you owe a lot of money and then see their reactions.

You are a Pro and I am sure you can handle it..

brian

[JoshinNC]

I had braced them for an amount due when I went through the organizer

You have to tell like it is. Tell the wife first then slowly let the husband into it. Ask questions like ; what happens if you owe a lot of money and then see their reactions.

You are a Pro and I am sure you can handle it..

brian

But I had "guesstimated" somewhere in the 10-15k range (for fed). I hadn't realized at that point that she didn't meet the age requirement for the distribution. I'm thinking face to face is definately going to be the way to go, though.

[Larmil]

Face to face

I would go with the face to face and ease them into it. Maybo first question would be "Do you realize that you owe $17,000 aditional tax on the distribution?"

I had the same thing several years ago. Had I told my client over the phone she probably would have had a heart attack. As it was she had a nervous breakdown, but survived it and the tax bill.

[jainen]

more upset about it

>>am totally disturbed by having to tell this couple how much they owe<<

You are probably more upset about it than they will be. They know they took an early distribution, but you don't make major decisions just on the tax effect.

They had an excellent reason because the benefits of home ownership far outweigh the benefits of letting the former employer keep all that money. What would you have advised them instead--pay rent the rest of their lives, and use their $171,000 bank statements to stuff the cracks in the wall?

Your should treat their choices and the results of their choices with dignity and respect. Their bank can give them an equity line that will cover the rest of the bill in a day. It sounds to me like they have more blessings than most people.

[JoshinNC]

good point Jainen,

>>am totally disturbed by having to tell this couple how much they owe<<

You are probably more upset about it than they will be. They know they took an early distribution, but you don't make major decisions just on the tax effect.

They had an excellent reason because the benefits of home ownership far outweigh the benefits of letting the former employer keep all that money. What would you have advised them instead--pay rent the rest of their lives, and use their $171,000 bank statements to stuff the cracks in the wall?

Your should treat their choices and the results of their choices with dignity and respect. Their bank can give them an equity line that will cover the rest of the bill in a day. It sounds to me like they have more blessings than most people.

I hadn't thought about the equity line angle. They'll get much cheaper payments there than they would have gotten from the IRS.

Thanks!

[OldJack]

I would call them on the phone to tell them the return was ready and break the new that they owe on the phone. Why should you have them in your office ranting about the tax when they can do that at their home before coming to see you.

[Zee]

I would call them on the phone to tell them the return was ready and break the new that they owe on the phone. Why should you have them in your office ranting about the tax when they can do that at their home before coming to see you.

My guess is when they made the 401K withdrawal they received information discussing the possible penalty and exceptions. I would start the conversation asking them if they received any information from the 401K provider about early withdrawal penalties, then explain the penalty to them. Let the 401K provider take the some of the "heat".

[JoshinNC]

That was my first question to them.

My guess is when they made the 401K withdrawal they received information discussing the possible penalty and exceptions. I would start the conversation asking them if they received any information from the 401K provider about early withdrawal penalties, then explain the penalty to them. Let the 401K provider take the some of the "heat".

The client actually called yesterday before I could get to them and told me he "couldn't take the anticipation", so I gave it to him over the phone. I asked him was he aware of the penalty and he said, "Yes, but only after we got the money." I asked him did they not advise his wife of this prior to the withdrawal and he said, "I don't know. She doesn't really know much about this stuff." Then I asked, why didn't you get advise before hand. He said he did, from his lawyer. Said the lawyer told him that since they were first time home buyers most of it would be excluded from income so they might even get a refund. I immediately told him "That's why you don't get tax advice from a lawyer". I then explained that the rule he was referring to only applied to IRA's (which this wasn't) and only excludes the first $10,000 (not $171,000). He's very disturbed by the whole situation, so I'm going to meet with him and his wife at their home next week. I feel that may help being in a more comfortable environment. They have the money to pay the tax, but it will wipe out their savings. I'm still going to talk to them about taking a HELOC to cover the taxes.

Thanks to everyone for your support, I'll keep you posted.

[OldJack]

>>I'm still going to talk to them about taking a HELOC to cover the taxes.<<

Those HELOC's should be sent back to their own country. Why should they be allowed to cover anything?

[JoshinNC]

I'm

>>I'm still going to talk to them about taking a HELOC to cover the taxes.<<

Those HELOC's should be sent back to their own country. Why should they be allowed to cover anything?

missing something

[thomtax]

I think he was joking about sending the HELOCs back to their own country. Just like sending KLINGONs, or FERENGI back to their own planet.

LT

[ChEAr$]

I thought

HELOCs came from Greece.

But what do I know?

[jainen]

invented in Greece

>>HELOCs came from Greece<<

They were first developed in Greece, but counterfeits are available on any street corner now.