Deferred compensation / Borrowing from IRA account

[kodex]

Need HELP!

38 years Taxpayer borrowed about $77,000 ( a distribution from IRA account ); federal taxes were withheld ( about $8500); Distribution code is 1.

This distribution increased his taxable income significantly. He owes federal about $25,000 and state about $7,000 as a result.

He used all the distribution (money) to buy a House ( primary residence ) on 10-01-08. He had heard candidate Obama mentioned that people would be allowed to take funds out of the IRA without any penalty; he is hearing that the government is giving away $7,500 ( now $15000 ) to a first time homebuyer...

Will appreciate any info. on the possibility of LEGALLY reducing he tax liability. ANY suggestion ? Anyway to legally get around the penalty for taking the distribution?

[Lion EA]

Well, there's an exclusion from the 10% penalty for $10,000 to a home buyer. And, he has $8,500 in taxes paid. And, for 2008 purchases of homes there's a $7,500 "credit" that's actually an interest-free loan unless Congress changes it to a real credit. All those have qualifiers, but hopefully you've read the instructions already. What else are you looking for? He can deduct mortgage interest and points and property tax on Schedule A. If he actually has a loan from his 401(k) instead of a distribution from his IRA, he needs to deal with getting corrected paperwork, but it sounds like the documents are correct.

[B. Jani]

The only exclusion is $10,000 from ira withdrawal is free from penalty. The $7,500 is a free loan as house purchased last year from government which needs to be paid in $500 every year. If the total includes withdrawal from his spouse ira, he can exclude another $10,000. But remaining he is out of luck.