I am 43 years old. In 2007 I took a hardship & removed $20,000 from my 401k. $2.000.00 was taken for taxes. I applied the rest in the purchase of my first new home. Now that it is time to file for tax season, will I have to pay taxes on the $18,000 that I used as a downpayment on a home loan? Does the IRS take in account that it was used to purchase a home?

I have the same question. Can some one answer in clear

You will have to pay taxes on the full $20K. You will also have to pay the 10% early withdrawal penalty, which is another $2K. The fact that you used the money to purchase a home does not mean you get the money tax free, and because you are under 59-1/2 you also have the early withdrawal penalty. There is often confusion on this point - if you had taken the money from an IRA you would not have the penalty, as a first home purchase is an allowable exception to having to pay the penalty. But for early withdrawals from a 401(k) the 10% penalty still applies.