Hi! My name is Patty and I have a question about 401k loans. I am recently divorced and purchased my first house by myself. In order to do that I had to borrow against my 401k to keep the payments down where I could afford them. I borrowed 50,000 and have a balance now of about 47,000.I fell in love and choose to relocate. I owned the house about 20 months and sold the home. I purchased a new home in Ct but do not have the money to repay the loan. The way I understand it, that 47,000 becomes income for this year added to anything else I make. Is there anything I can do to bring that number down, tax wise. I fear I will be owing money next year. I was thinking about going to school. Will that help any?:confused:

Nope, the balance of the 401K Loan will be added to your taxes for this year. In addition, there will probably be a 10% penalty that you will owe. Since there was nothing withheld, your taxes will greatly increase.

I would suggest, once you figure out what you owe, that you contact the IRS about a payment plan. I think they will be amenable, to spreading it out under the circumstances.

Scott covered it rather well.

You should prbably start making payments using Form 1040-ES.

It might also be worth mentioning that if you made a profit on the house when you sold it, you may face capital gains tax also. You must live in a home 2 out of 5 years for the gain to be exempt from taxes. It sounds like you missed that by 4 months.

Mobea has a good point.

However. You MAY qualify for one of the exceptions to meeting the 2-year rule, which will allow you to claim 5/6 of the exemption amount. That's about $200K, which should cover any capital gains.