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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29535
Experience:  Taxes, Immigration, Labor Relations
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Due to becoming unemployed, during tax year 2009 my wife withdrew

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Due to becoming unemployed, during tax year 2009 my wife withdrew about $40,000 from our IRA's. We did not have any taxes witheld. I also collected about $18,000 of unemployment benefits and did not have any taxes witheld.

Here's why: My employment was terminated in violation of state and federal law. After wrongfully terminating my employment, my former employer made misleading statements to unemployment officials, who in turn denied my unemployment. I hired an attorney ($$$) and appealed this decision. I won. However, my family was without any source of income for six months. Good news/bad news -- the decision has enabled me to file additional legal claims for damages (even more $$$ for legal representation.

How do I file?

During this time, my wife fell and broke her wrist, which required surgery. I was not extended COBRA benefits, but fortunately we had purchased catastrophic health insurance coverage. This insurance covered most of the claim, but we had to pay the first $7,500.

The distribution from the IRA account is a taxable income (unless you made any after tax contributions) - so $40,000 distributions should be added to your taxable income.

From unemployment benefits - first $2400 are not taxable - so $18,000 - $2400 = $15,600 should be added to your taxable income.

In additional - if you wife is below 59 1/2 the distribution from the IRA account is a subject of additional 10% penalty.

If your unreimbursed medical expenses exceeded 7.5% of your adjusted gross income - that part of expenses are not a subject of penalty. Also health insurance cost while unemployed may be excluded.
Use form - http://www.irs.gov/pub/irs-pdf/f5329.pdf

see exemption codes on page 3 in instructions - http://www.irs.gov/pub/irs-pdf/i5329.pdf

As you purchased a catastrophic health insurance coverage and paid $7,500 for medical services - these are deductible medical expenses and may be claimed on the schedule A - however such deduction is a subject of 7.5% floor limit based on your adjusted gross income (AGI) - see line 1 - http://www.irs.gov/pub/irs-pdf/f1040sa.pdf

 

legal expenses are generally deductible only if they are in connection with taxable income - thus if the settlement will be your taxable income - legal expenses to get that settlement will be deductible.

 

I understand your situation - however all damages including 10% additional penalty, lost of retirement savings etc - may be added to your claim and should be discussed with your attorney.

Let me know if you need any help.

 

Lev and other Tax Specialists are ready to help you
Customer: replied 7 years ago.

Thank you! As things come more into focus I will be in touch. I want to make sure I have all of my W-2's, 10-99's etc. before taking next steps.

 

My follow-on question will be: How to I finance my tax liability?

That is the main question for the whole life - where from get the money - not just to finance the tax liability.

As long as you did not plan accordingly, did not save funds for that and did not requested withholding - that is the situation.

 

I might only suggest to pay as much as you can to reduce possible penalties.

If you can borrow for a short term - that might be a good option.

If not paying on time was your honest mistake - you may ask the IRS to forgive penalties - but the interest charges will not be dropped.

Unfortunately - there is no simple solution.