Early withdrawals from retirement plans

Tax Rules on Early Withdrawals from Retirement Plans

Taking money out early from your retirement plan can cost you an extra 10 percent in taxes. Here are five things you should know about early withdrawals from retirement plans.

1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.

2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.

3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.

5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.

For more information on early distributions from retirement plans, see IRS Publication 575, Pension and Annuity Income. Also, see IRS Publication 590, Individual Retirement Arrangements (IRAs).

 
Eight Tax Benefits for Parents

Eight Tax Benefits for Parents

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012.   For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Self-employed health insurance deduction- If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.

 
DEDUCTIONS YOU CAN'T TAKE.

Although the tax code permits a wide range of deductions for taxpayers in various situations, thousands of filers routinely claim deductions for various types of expenses that are in fact non-deductible. Here is a list of some of the more common non-deductible expenses that show up on tax returns each year.

 


Spousal and Child Support
Many taxpayers try to deduct these two forms of familial support on their returns. However, alimony is the only type of income paid by one ex-spouse to another that can be deducted. 

Unreimbursed Work Expenses
Although self-employed taxpayers can deduct every dollar of work-related expenses, W-2 employees can only deduct unreimbursed expenses in excess of 2% of their adjusted gross incomes - and only those who are able to itemize their deductions.

Above-the-Line Deduction for Roth IRA Contributions
Unlike traditional IRA contributions, there is no deduction for Roth IRA contributions because the income distributed from them is tax-free, whereas traditional IRA and retirement plan distributions are taxable as ordinary income.

529 Plan Contributions
Taxpayers who contribute money to the 529 plan sponsored by their own state can often take a deduction for their contributions up to a certain limit on their state returns. However, there is no federal deduction available for this.

Political Contributions
Cash or property donations to any qualified 501(c)(3) organization are deductible, but political parties do not fall into this category. Unfortunately, but that $100 you sent in to get the candidate of your choice elected doesn't go anywhere on the 1040. 

Homeowners' Insurance
The only time that this can be deducted is for those who either use part of their home for business or for those who own rental properties. Homeowners outside these categories cannot deduct their homeowners' or rental insurance under any circumstances. 

 

Life Insurance Premiums

Except for coverage available inside Section 125 Cafeteria Plans and a small amount that can be purchased inside a qualified plan, life insurance premiums are non-deductible for individuals. Group life insurance premiums can be deducted by employers within certain limits.

Dependents Whom You Cannot Claim
Many separated and divorced couples race to claim some or all of their dependents each year whether they can or not. The IRS has a fairly clear, albeit complex set of rules that determine who gets to claim which kids. In some cases, one parent will get to claim the dependency exemption, while the other is eligible for the Child Tax Credit or Dependent Care Credit. 

However, both parents often try to claim the same dependent in the same year, thus causing the return of the one who files second to be rejected. Those in this category who are legitimately entitled to claim a dependent or dependents must take up their case with the IRS and furnish proof, such as a divorce decree, that establishes their eligibility.

Substantial Contributions of Tangible Property to Charities
Although the entire amount of any property that is donated to charity can be deducted eventually, the dollar limits for this type of contribution are lower than for cash. Cash contributions of up to 50% of adjusted gross income (AGI) are deductible, but property donations have a limit of 20% or 30% of AGI. 

Make sure that your property does not exceed these income limits in the year that you give it to your charity. (Being generous has never been more (financially) rewarding! 

Passive Losses
Tax losses that are generated from certain types of investments or activities, such as partnerships, can only be written off against passive income, which is defined as income for which the recipient had no material role in generating. Passive losses cannot be deducted against active income, such as earnings or investment income. 

Capital Losses
Although capital losses can be used to offset any amount of capital gains, they can only be deducted against $3,000 of other income each year. If you flushed your $50,000 nest egg down the toilet last year in the stock market and had no gains to declare it against, then you will only be able to deduct $3,000 of that loss as a long or short-term loss each year. 

If you try to write the entire balance off at once, the IRS will gently inform you that you will have to prorate the loss for the next 17 years. Unless, of course, you reap a large gain in the future, in which case you can write off as much of the remaining loss as there is against whatever amount of gain you have earned.

The Bottom Line
This is only a list of the more common deductions that taxpayers frequently attempt to claim. If you are unsure whether a specific expense that you incurred during the year is deductible, visit the IRS website at http://www.irs.gov/ (The receipts you cram into your wallet could be replaced with cash come tax season.)

 
Claiming Overpaid Taxes

If you're eligible for any of the above tax credits, the IRS allows you to reclaim your lost money by filing an amended tax return for prior years. However, you generally can file an amended return only for up to the past 3 years.

 
Self-employment Tax Deductions

If you're self-employed, you could qualify for additional income tax deductions. If you work out of your home, there are even more opportunities to claim your expenses. Here are a few examples:

* Deduct half of your self-employment tax.
* The Section 179 Deduction generally allows you to write off up to $250,000 of business property other than real estate purchased in 2009. Higher limits may apply.
* If you use a part of your home exclusively and regularly for business, you can deduct the business portion of rent, mortgage interest, real estate taxes, utilities, insurance and repairs.
* You can establish a retirement plan that may allow you to make contributions that exceed the amount you can contribute to a traditional IRA or Roth IRA. This deduction is not allowed for self-employment tax purposes.

 


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