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Thanks for your question.
You can claim your son as your dependent under the qualifying child rule if:
1) he was still 18 or younger on 12/31/09
2) He lived with you more than half of 2009
3) You provided more than half of his total support
4) he does not file a married joint return
5) he does not qualify to be a dependent of someone else
He would need to report on his tax return that he can be claimed as a dependent by someone.
For the 401k funds, he will need to report include it in his taxable income but the 10% penalty for early withdrawal does not apply since he inherited the money. The Form 1099-R form should show a distribution code of 4 which exempts him from the penalty.
Hope this helps,
Thanks for your reply. Sometimes the payer does not put the proper code on the 1099-R. It does not matter if your sister was under 59 1/2 or if the plan was active at the time she passed. If your sister properly designated your son as the beneficiary of the 401(k) plan, your son inherited the money when she passed. Your son is not liable for the 10% early distribution penalty although any withdrawals are includable in taxable gross income.
Since the 1099-R form is showing code 1, your son will need to file a 2009 Form 5329 with his return to claim an exception to the penalty. Enter the amount of the distributions on lines 1 and 2 and -0- on line 3. To the left of line 2, enter code 3 for the inherited exception code.
Sorry, that should be distribution code 4 (not 3) above.
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