During the 2015 tax year I became legally separated.
During the separation my ex-wife did not agree to a QDRO when cashing out her equity from jointly owned property. The cash out was mandated by our separation agreement which was filed with my state of residence.
As a result, when I made a $40,000 early withdrawal from my 401K to satisfy the equity payment, listed on my 1099-R as a total distribution, I incurred the extra tax penalty. I also filed head of household with 1 child as a deduction, and my income pre-401k withdrawal is too high to qualify for any credits.
My tax bill is higher than I can afford to pay cash with (low 5 digits), and I am trying not to panic. This is the first time I have ever been in a position where I owe taxes and I am unfamiliar with what my options are.
As I understand it, the IRS states that I can establish some kind of payment plan, but economically speaking, what does this involve? Do I have only a certain time period (the tax year) to pay it or is it spread out over time?
What about other options? Should I negotiate somehow to have it reduced, since the withdrawal, in spite of it not being a QDRO, was used exclusively and entirely to satisfy the separation agreement?
I can make the payment if I split it between two credit cards that I have, but that would effectively max me out and could potentially ruin my credit.
I have good credit (upper 700s) and equity in my home that I could use to take out a loan to cover the balance. This to me makes the most sense as I would certainly get a better rate than the penalties and interest the IRS would slap on, but I hate the idea of extending/creating another line of credit.
Are there others I have not considered?