Some IRA Early Distributions Escape Penalty Revenooer Rants

Generally speaking, distributions from IRAs before one reaches age 59-1/2 trigger a penalty for early withdrawal – the Revenooers want you to keep the dough in the account until you are truly long in the tooth and truly need the money to support yourself in retirement.

But for any number of reasons, a bloke may take the money out early without the imposition of the IRS fine.  Some of the permissible early withdrawal situations are:

  • After the death of the participant (We guess the Revenooers are just being reasonable, here, figuring that you can’t take it with you, so why not allow distributions.)
  • Total and permanent disability of the participant.
  • To enable the participant to pay for qualified higher education expenses.
  • To allow a “qualified first time homebuyer” to get into that new abode (up to $10,000).
  • To pay for unreimbursed medical expenses.
  • To pay for health insurance premiums while unemployed.

So, be advised, when you receive that 1099 (which also goes to IRS)

reporting your IRA withdrawals last year, if you’re below the magic age.

And here’s an interesting recent decision from the Tax Court.  A lady who donated her eggs for use by infertile couples received $20,000 from an egg donor facilitator, who also issued the taxpayer a 1099 reporting the payment.

She chose not to report the sum as income, however, on the theory that the payments were legitimately excludable under the Internal Revenue Code, which does have a provision allowing taxpayers to avoid tax on amounts received in exchange for “pain and suffering,” (endured during the lengthy egg retrieval process in this case).

“No way,” concluded the Tax Court (after the IRS got on our gal’s case), reasoning that because the egg donor voluntarily signed a contract to be paid to endure the medical procedures, the amounts she received were not excludable damages.  Instead, the dollars constituted compensation for services, and were thus includable in gross income.

And finally this week – another recent case, allowing a mortgage interest deduction to a chap who didn’t actually hold title to the hostel in question.  He was, though, operating under an oral agreement to purchase the property from some family members.  Although he didn’t hold legal title, nor did his name appear on the mortgage, the Tax Court concluded that he was an “equitable owner” because he paid the mortgage, taxes and insurance on the property.  This concept of “equitable” ownership is specifically sanctioned by the IRS’ own regulations.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

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