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Taxes on 401(k) loan repayments
Dear Tax Talk:
I have taken several loans from my 401(k) over the years to buy
houses. It appears to me that I am repaying the loans into my 401(k),
both principal and interest, with money that is being taxed. Am
I correct?
If I am correct, after 59½ when I begin withdrawing
retirement funds from this account will I be taxed again on the
portion of money I've already paid tax on? Or is there some way
to document the money that went into my account that I've already
paid tax on, so I don't pay tax on it twice?
Pat
Dear Pat:
I can see your reasoning, but what you're forgetting is that when
you originally put the money in your 401(k) (and later borrowed)
you didn't pay tax on it. And when you borrowed it, you didn't pay
tax on it. So later, after you put all that you borrowed back in,
you're still going to have to pay tax on it. The same would be true
if you didn't put all that you borrowed back in.
Taxes on lawsuit -- or settlement
-- proceeds
Dear Tax Talk:
I have a claim against a party for malicious prosecution and intentional
infliction of emotional distress. I have not yet filed the lawsuit.
I expect to ask for attorney's fees, damages for pain and suffering,
and punitive damages. I believe that the party will settle prior
to going to court to avoid the adverse publicity.
What part of these damages will be taxable? Does the
answer differ if we settle via a contract prior to my filing a lawsuit?
If we agree to a settlement (either in court or via
contract) where the party agrees to make payments to me over time,
can the party then file bankruptcy and avoid paying me?
Thanks.
Jay
Dear Jay:
I'm always leery of responding to claimants in lawsuits, thinking
that I may be the next respondent.
Putting aside my fears, I can tell you that the recovery,
including punitive damages, is taxable. The law only excludes recoveries
for physical injuries, not emotional injuries. Whether the recovery
is through judgment or settlement the answer is the same.
You should also look at my
answer of October 27, 2000 for the latest Internal Revenue Service
trends on contingent attorney's fees.
-- Posted: July 13, 2001
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