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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
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 4 other Tax Specialists are ready to help you
Customer: replied 6 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.