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When “What If” becomes “What Now”
September 16, 2011
I would be making an understatement if I said the economy has been unkind these past few years. Many Americans have experienced significant financial difficulties and with threats of a double-dip recession looming, I do not see the outlook brightening in the near future (take this as you may, I am not an economist by any means). The point I want to make is that the financial decisions do not take place in a vacuum and the potential tax consequences should always be considered. Lose your job? Unemployment compensation is taxable income. Can’t make the car payment anymore? Repossession does not bring finality. If the lender forgives the remainder of the loan, you might have cancelation of debt income. A common occurrence that quickly leads to incurring a sizeable tax liability is cashing out portions of a 401K to pay down other bills. Doing this is a triple threat because the distribution is taxable, usually subject to a 10% penalty and in many instances, places the taxpayer in a higher tax bracket. You have options. Incurring a tax liability you did not foresee is not the problem. Failing to address the tax liability is the problem. Of course, I will be there to help if needed, but a lot of energy and money could be saved simply by knowing the tax impact of certain financial decisions ahead of time. Fortunately, I do not have to describe them to you because the IRS has already done that for me here.