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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22833
Experience:  Taxes, Immigration, Labor Relations
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Good Evening, I am attempting to determine how much Income

Resolved Question:

Good Evening,

I am attempting to determine how much Income tax would be due if I withdrew funds from my inherited Fidelity Traditional IRA that I received upon my spouse’s Death in February 2008.

Here are the basic facts which are followed by the breakdown:
I am 66 years old, retired and receive a monthly income of :

$1776.00 from l Social Security Benefits of $1776.00/month and Medicare b of $99.00 is deducted from this, I began receiving this amount effective March 2012, and received $1442.o/month in January and February 2012. $1052.0 0 Federal retirement FERS)and $ 187.18 is deducted for Medigap coverage, and $584.28 minus $5.84 taxes monthly plus less than 4100/year interest on checking/saving/checking.

M y house taxes are approximately $5200.00/yearand I acquired another property and paid back taxes of $6185.00 for 2010 and 2011, which generally average 2400.00 year.

2012 Income 2012 Deductions

Social Security payments: $20,644.00 Medicare payments $ 1188.00
FERS retirement $12,624.00 Medicare Supplement $ 2246.16
InterTek survivor benefits $ 7,011.36 Income tax $ 106.08
2012 Income Totals $40,279.36 Real Estate taxes $ 5500.00 my home
Acquired by 2010, 2011 Back taxes paid $ 6100.00 Real Estate Property
2012 taxes due for same acquired property $ 2400.00
Medical Bills paid $ 2900.00

Although there is no house mortgage, my usband died intestate and the associated probate and attorney expenses were very high and required all of my savings plus a loan.

My tax preparer suggested I take out a mortgage o my house, which was already mine with no mortgage payment, just taxes and insurance, and advised me not to work for more than $14,000. In wages for 2012 because of social Security and taxes. I do not want a mortgage.

I would like to withdraw $20,000 from the inherited Fideity Traditional IRA and want to know how is this going to affect my Social Security benefits – for example, am I going to be paying them $1.00 for every $2.00 over the $34,000. I am supposed to be able to earn with no paybacks? I am definitely going to withdraw $14,000.00 and would like to know how will my taxes be affected in both withdrawal cases?

Thank you,
CAJ
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to Just Answer!
So far - based on your information - following is your taxable income:
FERS retirement $12,624
InterTek survivor benefits $ 7,011
Social Security payments: $20,644 - taxable part $ 2478
2012 Income Adjusted Gross Income (AGI) - $22113.
You will be able to deduct personal exemption $3800, and
if you are using standard deduction - $7250
If you itemize - following will be included
Real Estate taxes $5500
Real estate taxes paid in 2012 for past years $6100
2012 taxes due for same acquired property $ 2400
Total real estate taxes $5500+$6100+$2400 = $14,000
Medical Bills paid $ 2900 plus Medicare payments $1188 + Medicare Supplement $2246 = Total medical expenses $6334
Deductible medical expenses $6334 - $22,113*7.5%=$4675
Total itemized deduction $14,000+$4675=$18,675
Because that amount is larger that your standard deduction - you will likely itemize.
So far your estimated TAXABLE income $22113 - $3800 - $18,675 - would be negative - and whatever were withheld $106 - will be refunded to you.

If you will have additional taxable distribution from your inherited Fidelity Traditional IRA - $20,000 will be your additional income - that will not affect your eligibility for social security benefits - because that is not earned income - so nothing you would need to pay back to SSA.
However - your tax liability will be different.

First of all - out of your Social Security benefits $20,644 - taxable part would be $20,644*85%=$17547
Plus additional $20,000 in taxable IRA distribution
So your AGI will be $57182

Your Deductible medical expenses $6334 - $57182*7.5%=$2045
Total itemized deduction $14,000+$2045=$16,045
So far your estimated TAXABLE income $57182 - $3800 - $37337 and your estimated tax liability is $7600.
- minus whatever were withheld $106 - and you will owe $7500.
You tax liability would be less if you have additional items to itemize - charitable donations, mortgage interest, etc.

Let me know if you need any help.
Customer: replied 2 years ago.

Thank you for the information, and please accept my apology for not being able to get back to you sooner – between unexpected visitors, my seeking more information, and my reply to you going off into cyberspace, I am hoping this will get through.


 


I have been informed that I may return any funds I do not wish to keep back to the Traditional IRA within 60 days, one time each 12 months in a calendar year, and the taxes will be credited accordingly.. I have now decided to withdraw the total amount from this fund which is $24,714.50, and would like to know, based on the previous information of withdrawing $20,000.00, how much tax will I need to be withheld, since it puts me into yet another tax bracket.


 


Repairs absolutely need to be done before things become worse, and it will be so much easier and faster to get them accomplished if I have cash-on-hand as opposed to charging on credit cards, especially if there is a chance of returning some of the withdrawal. Should the tax withheld from this amount of $24,714.50 be 40% or more since it is $4,714.50 more than the original $20,000.00 I was thinking of?


 


Again, I thank you so much for the detailed information and for your assistance.


CAJ

Expert:  Lev replied 2 years ago.

I have been informed that I may return any funds I do not wish to keep back to the Traditional IRA within 60 days, one time each 12 months in a calendar year.

The IRS specifically prohibited to borrow from the IRA account - so you may not take the money out and return them back.

However you may rollover funds into different IRA account within 60 days - and that will be a nontaxable transaction.

 

I have now decided to withdraw the total amount from this fund which is $24,714.50, and would like to know, based on the previous information of withdrawing $20,000.00, how much tax will I need to be withheld, since it puts me into yet another tax bracket.

As we estimated above $20,000 distribution will result $7500 in taxable income.

As you are in 25% tax bracket - additional $4,714 in taxable distribution - will result ~$1200 in tax liability - total $8700.

You may request withholding before distribution - use form W4P - www.irs.gov/pub/irs-pdf/fw4p.pdf

Let me know if you need any help.

Customer: replied 2 years ago.

Thank you for clarifying the IRA particulars.


 


I just finished discussing other IRA possibilities with the IRA person, in case it happens that I do not use all of this fund, and she stated that they will go ahead and fill out the W4P for me because they still do that for their clients, and will follow my instructions for the $ amount I request them to withhold.


 


I shall follow your advice and request $8700 be withheld for taxes - I much prefer to take care of that issue now rather than later.


 


I both appreciate and thank you for the offer to assist with the W4P because it appears to be quite overwhelming.


Do you know of any other issues/pitfalls I should be aware of before I proceed with this?


 


Thank you,


CAJ

Expert:  Lev replied 2 years ago.
From tax prospective - it would be better to spread distribution over several years and reduce overall tax liability.
For instance - you may take some distribution in January of 2013 - and that amount will be taxable for next year.
However - funds in your IRA account are yours - and you may take distribution as you need or wish - but should consider additional tax liability - in your situation that liability will be based on two main factors - (1) larger part of your social security benefits becomes taxable and (2) you are pushed into a higher tax bracket.
On other hand - you may increase your deductions in 2012 by prepay some real estate taxes in 2012 for following year, making larger charitable contributions, pay for some medical expenses, etc in 2012 - so your deductions would be larger.
There will be additional deduction for state sales tax - so if you purchase large items - such as a car or building materials - you might want to retain receipts.
Other than that - I am not aware of any possible issues.
Be sure to ask if you need any help.
Customer: replied 2 years ago.

I am glad I asked that last question. Part of this money is going to be used for repairs on two items - a vintage vehicle


that is not running and I am hoping to have it repaired to sell and house repairs on the property acquired through paying the taxes, and am now asking what type of building materials are deductible?


Now that you mentioned this, I realize I do have some charitable donations along with receipts for 2012 to include a few more low cost medical deductibles, and I routinely keep sales tax receipts when shop. I know in some years sales tax receipts have been deductible for other items besides large ticket vehicles and boats, etc.. I shall now pay the


property taxes by December 31 of the year issued.


 


This IRA situation is something I have never dealt with before and welcome any knowledge or advice from you, it is much appreciated.


 


At this time, I don't see how I can accomplish what i need to get done in two steps and am hoping the car sale will allow me to replace some of the fund in another IRA. I will re-review and study the info you have provided before I make a final withdrawal decision.


 


I am curious to know about which type of building materials that are tax deductible.


 


Thank you,


CAJ


 


 


 

Expert:  Lev replied 2 years ago.
1.
You may not deduct the cost of building materials... instead the cost is added to the basis and will reduce the gain when the property will eventually be sold.
However you may deduct sales taxes paid when you purchase building materials.
2.
You may deduct actual sales taxes paid - based on all your receipts OR you may calculate sales tax deduction based on IRS tables - in this case no need to keep receipts.
However sales tax paid on car purchase and building materials are deducted in additional to the value determined in the IRS tables.

Let me know if you need any clarification.
Customer: replied 2 years ago.

Thank you for the info and the great detail involved in the answer. I feel sure I do not have any more questions about this IRA withdrawal and the change it will produce in income and subsequent tax status. I did not know anything in the beginning, and I now have a complete understanding of the situation, thanks to your data presentation, and feel I can make an informed decision based on this knowledge.


 


Thank you so much.


CAJ


 


 


 


 


 

Expert:  Lev replied 2 years ago.
Appreciate your warm words.
I am very glad to be helpful.
Be sure to come back for all your tax related issues.
Customer: replied 2 years ago.

You are so welcome, and I will definitely go back to you for any tax questions.

Expert:  Lev replied 2 years ago.
Thank you again!
Customer: replied 2 years ago.

Good Wednesday Mr.LEV


 


I thought I was finished with this IRA Distribution issue; however, that is not the case and apologize for thinking so.


 


Today, I requested the complete IRA account withdrawal and requested $8700 be applied to income tax on the IRS Form W-4P and received completely opposite information concerning the W-4P, and was informed that they will not process it as they "are not tax consultants" and they are processing it on a 1099R, will notify IRS of the withdrawal and send the money to IRS in February at "tax time", and send me a copy of the 1099R along with an IRS publication of tax responsibility, and it was suggested consult a tax expert to fill out the W-4P. I explained that I had declined your offer of assistance after being informed by the IRA agent last evening that their company still processes the Form W-4P for their clients, and asked if submitting their 1009R and a W-4P, as well, would appear to look like two separate tax $8700 withdrawal notices to IRS, and was informed "I do not know" by today's IRA agent. I told him I did not know the content differences between the two IRS Forms and how it affects this situation, and by the time I finished my statement they intimated that it was already done and will be going out to me in today's mail.


 


My questions are: Will the 1099R be sufficient or do I still need to process the W-4P? And: is this the type of situation that turns into a nightmare at tax time in April ?


 


Thank you,


CAJ


 

Expert:  Lev replied 2 years ago.

The form 1099R is issued by the administrator of your IRA account to report to you and to the IRS the fact of distribution

box 1 - total distribution

box 2a - taxable amount - in most situation amounts in box 1 and 2a are equal

box 4 - tax withheld - that is the amount the administrator remits to the IRS

You will use information from form 1099R when you will prepare your tax return.

 

So - the form 1099R is used to report the distribution AFTER it occurs.

The form W4P is used BEFORE distribution - that form is submitted to the administrator of your IRA to request specified tax withholding.

You do not have to request withholding. If you do not provide that form - normally the administrator withholds 10%.

So if you requested distribution of .$24,714.50 - your withholding is expected to be $2,471 - and the rest you will pay at the tax time or before.

There is no nightmare - as long as you will pay on time.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22833
Experience: Taxes, Immigration, Labor Relations
Lev and 8 other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Thank you for the explanation. This has been a learning process for me and I am relieved to know that the tax situation is more than minimally covered by 1099R.


 


I feel I am now completely aware of the process and the rationale for it.


 


Thank you once again, and I hope you have an excellent evening.


 


CAJ


Expert:  Lev replied 2 years ago.
You are very welcome.
Appreciate your positive rating and generous bonus.
Be sure to come back for all your tax related issues.

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