Mortgage typo leads to tax questions

When I cast my mind back to eight years ago, to when my wife and I bought our first home together, all I remember is the stress.

Overwhelming, mind-numbing, curl-up-in-the-fetal-position stress, born of trying to get a good deal and prepare to move amid a flurry of paperwork and jargon.

So I can understand the particular dilemma of this week's e-mailer.

Liz wrote to say that she and her husband bought a house this past summer.

"We emptied an IRA and accepted a financial gift from a family member to come up with a sufficient down payment," she wrote. "The process was long and difficult, so when a typo occurred in our down payment amount on our closing documents, we decided to let it go. It was for a few thousand dollars less than we had planned to put down, and we figured we'd add the difference directly to principal on our first mortgage payment.

"Now, I'm concerned about the tax implications. How will I be held responsible for closing an IRA account and accepting a gift when the total amount of money is greater than the down payment I made?"

First, Liz, I see why you let the typo go. You're probably wishing now that you hadn't done it, but to avoid more delays, I'm sure many of us would have made the same choice.

To find out where you go from here, I contacted Preston Eichers, a certified public accountant with Hansen, Barnett & Maxwell P.C. in Salt Lake City.

Eichers wrote in an e-mailed response that, as always with such questions, many other questions arose in his mind. For example, he wondered: Were Liz and her husband first-time homebuyers? How old are they? How much was in the IRA when they "emptied" it? How much was the gift? And so on.

Despite such questions, Eichers decided he would "answer by answering some of the questions that I would have asked them, if I had had a chance."

With that in mind, he wrote that a distribution from a traditional IRA is taxed as ordinary income to the individual receiving the distribution.

"If distributions are made to an individual before age 59 1/2, they may also be subject to a 10 percent early withdrawal penalty," he wrote. "However, the 10 percent penalty does not apply if the individual uses the IRA distribution for certain expenses of a first-time homebuyer. Only $10,000 during the individual's lifetime may be withdrawn without penalty for this purpose."

That gives some background on the IRA. The gift is a different issue.

"With regard to the gift, there would be no tax incurred by the receiver of the gift, regardless of the amount gifted," Eichers wrote. "The taxation of the gift would be the responsibility of the giver and would depend on how much they gave.