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Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
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Experience:  Nearly 30 years of varied tax industry exp. Tax Biz owner
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In 2010 I borrowed from my retirement funds and repaid the

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In 2010 I borrowed from my retirement funds and repaid the loan amount fully within 60 days. In 2011 I was forced to do the same thing with my wife's retirement fund and we also repaid that loan almost immediately.

I rec'd a 1099-R form for my wife. Do we need to file that even though the monies were repaid into her account?

If I am stuck what do you suggest as the best way forward?
Submitted: 2 years ago.
Category: Tax
Expert:  Tax.appeal.168 replied 2 years ago.
Hello, THANK YOU for choosing Just Answer. My goal is to help make your life...a little...LESS taxing.

Since you rec'd the 1099-R, you should report it on your tax return. What amount is shown in Box 2a of the 1099R? If it does not show an amount in Box 2a, this means that non of the distribution is taxable, However, if it does show an amount in box 2a, this is the amount that is taxable. If the total distribution box is checked, this means that the total distribution amount is taxable. If you're preparing your taxes yourself, you should enter the amounts as they are shown on the 1099-R.

Please let me know if I can be of further assistance to you regarding this matter.

Thank you.
Customer: replied 2 years ago.
Yes, box 2A shows the total amount in the fund at the time. Since we're going to need to pay tax on it I'm probably going to close out that account now. I'm assuming I will not deduct any taxes on that distribution coming this now. However, what will happen in 2012 come tax season when I've already paid taxes on it for 2011?
Expert:  Tax.appeal.168 replied 2 years ago.
Hello again,

I'm a little unclear as to what you mean by Box 2a shows the total amount that was in the fund at the time. Did you withdraw the total amount from the fund? Does Box 1 and 2a show the same dollar amount? Does Box 4 show that any federal income tax was withheld from the distribution? Please clarify the following..."I'm assuming I will not deduct any taxes on that distribution coming this now". The 1099-R that you receive next year for TY 2012 should reflect any taxes that you pay this year for distributions.

Let me know if you need further clarification.

Thank you.
Customer: replied 2 years ago.
Box 1 and 2a show the same amount which was nearly the total amount, but not quite, in the account at the time. There was no FIT witheld at the time. The money was returned to the account within about 15 days.

Since I will be paying taxes on my 2011 tax return on the distribution (even though I'm not actually closing the account out until very soon from now), I'm assuming I will not withold FIT when I take the distribution, right?

Expert:  Tax.appeal.168 replied 2 years ago.
Ok, so this means that the full Gross Distribution amount is taxable, and this is the amount that you will be paying taxes on. I should have asked this earlier, what is the distribution code in Box 7? It's important for me to know this information. If you're contemplating closing the account this year (2012), tax will be due on that distribution that you take this year if no taxes are withheld when you take the distribution. The tax that you will be paying is for the 2011 distribution amount. Normal distributions are taxed as ordinary income, and sometimes there is a 10% early withdrawal penalty, depending upon the rules of your retirement plan.
Customer: replied 2 years ago.
The distribution code is 01 in Box 7.

However, if I'm reading your response correctly, I will be taxed twice on the same money?! Once in 2011 and again in 2012? Please advise.
Expert:  Tax.appeal.168 replied 2 years ago.
The distribution code 01 is used to identify an early distribution. SEE BELOW:

------------------------------------------

Generally, the amounts an individual withdraws from his or her IRA or other qualified retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax and report the amount to the IRS for any early distributions, unless an exception applies.

Exceptions: There are several exceptions to the age 59½ rule. Even if individuals receive a distribution before they are age 59½, they may not have to pay the 10% additional tax if they are in one of the following situations.

They receive a distribution from a retirement plan (other than an IRA) after leaving a job and are age 55 (age 50 for qualified public safety employees).
They have unreimbursed medical expenses that are more than 7.5% of their adjusted gross income.
The distributions are not more than the cost of their medical insurance (IRA only).
They are disabled.
They are a beneficiary of a deceased plan participant or IRA owner.
They are receiving distributions in the form of an annuity.
The distributions are not more than their qualified higher education expenses (IRA only).
They use the distributions to buy, build or rebuild a first home (IRA only, and limited to $10,000).
The distribution is due to an IRS levy.
The distribution is a qualified reservist distribution.
The distribution is made to an alternate payee under a QDRO.
They are receiving a distribution timely made to reduce excess contributions under a 401(k) plan.
They are receiving a distribution timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
They are receiving a distribution timely made to reduce excess elective deferrals.
They are receiving a permissible withdrawal from an EACA.

--------------------------------------------

Is this a Traditional or Roth retirement account? I don't understand why you are thinking that you will be taxed on the money twice. Was the money taxed when you made the contributions to the retirement fund?
Customer: replied 2 years ago.
Thank you for your patience and for your answers. It is a traditional IRA.

Ok, I'm clearly confused. My thinking is this: I will pay income taxes on my 2011 return on the total disbursement amount shown in Box 2a. Correct?

2nd, since I'm closing the account out in 2012 what will be my tax obligation on my 2012 income taxes? Or alternatively, should I withold income taxes when I close that account out in 2012? Because if I do, or if I'm obliged to pay taxex in 2012 in my way of thinking I would be being taxed twice on that money.

Please straighten me out. Thanks!
Expert:  Tax.appeal.168 replied 2 years ago.
Your are welcome, and thank you for your patience as well. I'm sorry that this is confusing to you.

Q: Ok, I'm clearly confused. My thinking is this: I will pay income taxes on my 2011 return on the total disbursement amount shown in Box 2a. Correct?

A: Correct, Box 2a shows the taxable amount. The taxes that you will be paying is for the distribution taken in 2011.

-----------------------------------------------------------

Q: 2nd, since I'm closing the account out in 2012 what will be my tax obligation on my 2012 income taxes? Or alternatively, should I withold income taxes when I close that account out in 2012? Because if I do, or if I'm obliged to pay taxex in 2012 in my way of thinking I would be being taxed twice on that money.

A: If you close the account out this year (2012) and have taxes withheld from the distribution amount, if enough taxes are withheld, you will not have to pay income taxes again on the distribution when you file your 2012 tax return. However, if you are not age 59-1/2 years of age at the time of the distribution, the additional 10% penalty will apply. You will not be paying income tax twice on the distribution amount that you take this year.

I hope this clarifies matters for you.
Customer: replied 2 years ago.
Ok, please walk me through this. Let's say the amount is $10,000 in the fund and my tax rate is 30%.

Roughly, what would I be paying in 2011 taxes and then (again roughly) what would the 2012 obligation be.

I recognize the 10% penalty will apply (I'm 52). For some reason I can't seem to get how I'll get taxed in 2011 and then again in 2012 and that all works out ok.
Expert:  Tax.appeal.168 replied 2 years ago.
Ok, the amount in the fund is $10,000. Your tax bracket is 30%. Let's say hypothetically you withdrew $8,000 of that in 2011. $8,000 x 30% = $2,400. The tax on the $8,000 withdrawal would be $2,400. Let's say you closed out the account this year 2012 and withdrew the remaining $2,000, $2,000 x 30% = $600.

Based on the hypothetical withdrawal of $8,000 in 2011, the early withdrawal penalty amount is $800 (10% of the $8,000). For 2012, based on the hypothetical withdrawal amount of $2,000, the early withdrawal penalty would be $200. Remember that the early withdrawal penalties are in addition to the tax.

Let me know if this explanation clarifies matters for you.

Thank you.
Customer: replied 2 years ago.
Ok, so the 2012 tax is on the remainder that was untaxed in 2011.

I guess the problem for me was in the fact that I put the money back in the account in 2011, so as far as I'm concerned I have never actually held onto the money as we put it back in the account.

Thank you.
Expert:  Tax.appeal.168 replied 2 years ago.
Unless you close the account out and withdraw whatever is left in the account, there will be no tax.

I understand that you put the money back, but if a check was issued to you for the amount that you withdrew in 2011, it is considered a distribution. SEE BELOW

-------------------------------------------------

Are Distributions Taxable?

In general, distributions from a traditional IRA are taxable in the year you receive them.

Failed financial institutions. Distributions from a traditional IRA are taxable in the year you receive them even if they are made without your consent by a state agency as receiver of an insolvent savings institution. This means you must include such distributions in your gross income unless you roll them over. For an exception to the 1-year waiting period rule for rollovers of certain distributions from failed financial institutions, see Exception under Rollover From One IRA Into Another, earlier.

Exceptions. Exceptions to distributions from traditional IRAs being taxable in the year you receive them are:

Rollovers,

Qualified charitable distributions, discussed later,

Tax-free withdrawals of contributions, discussed earlier, and

The return of nondeductible contributions, discussed later under Distributions Fully or Partly Taxable .

LINK TO REFERENCE SOURCE:

http://www.irs.gov/publications/p590/ch01.html#en_US_2011_publink1000230799
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Experience: Nearly 30 years of varied tax industry exp. Tax Biz owner
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