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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4024
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Trying to verify if I cash out an old IRA that the federal

Resolved Question:

Trying to verify if I cash out an old IRA that the federal tax liability from that would be refunded up to $25,940 (for claiming 2013 adoption tax credit for 2 special needs children). I am trying to make sure that the federal tax from IRA is treated same as income tax (in regards XXXXX XXXXX able to get the full adoption refund).
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi,

NPVAdvisor :

The net effect will be that ... although it's really two different taxable events

Customer:

Hello

NPVAdvisor :

The IRA distribution will simply be added to your income.... lets say you distribut 10,000 and made 50,000 in wages ... for tax purposes, you made 60,000 that tax year

Customer:

Ok, so basically the federal tax owed on the IRA distribution would be treated the same as if it were income?

Customer:

Yes, OK...that is what I wanted to make sure of.

NPVAdvisor :

THen the adoption credit is just that a credit from your tax bill

NPVAdvisor :

that's right

NPVAdvisor :

Remember, however, that if you are under 59 and 1/2 there's the additional 10% penalty for early retirement distribution, so in our scenario above, there would be an additional 1000 in tax ... But again, the other side of that coin is that the adoption credit is an actual dollar for dollar reduction of the tax bill itself (rather than just a deduction from income for figuring the tax) ... and ... The American Taxpayer Relief Act of 2012 (H.R.8) enacted on January 2, 2013 permanently extended the adoption credit

Customer:

Thank you. I wanted to make sure since they were different tax events, that they would not be treated differently

Customer:

Yes, the tax penalty we will have to eat. And assuming we have to pay state tax on the distribution as well.

NPVAdvisor :

that's right ... but again (all other things being equal) the credit takes off more than the distribution adds, because the adoption credit is a tax CREDIT not just a deduction from income

NPVAdvisor :

Sounds like you have it!

Customer:

Do you know if I will have to pay state taxes on the IRA distribution? I would probably have fidelity withhold that if so

NPVAdvisor :

North Carolina, right?

Customer:

YEs

Customer:

"yes"

NPVAdvisor :

I think so, just let me check for you ... just a sec

Customer:

thank you

NPVAdvisor :

You're in luck ... actually NC has a retirement income deduction (up to 2000)

NPVAdvisor :

See this from NC dept of revenue:

NPVAdvisor :

If your federal adjusted gross income includes retirement benefits from a private retirement plan, you may be able to deduct up to $2,000. If you received retirement benefits from more than one private retirement plan, you will not get a separate $2,000 deduction for each distribution. You may deduct only the total amount included in federal adjusted gross income or $2,000, whichever is less. If you received both government and private retirement benefits, your maximum deduction is the total amount included in federal adjusted gross income or $4,000, whichever is less.

Customer:

I am withdrawing 98,000 from my IRA ...I would owe somewhere around $7,600 in state taxes. Would I be able to reduce that tax amount by $2,000?

NPVAdvisor :

that's exactly right

Customer:

Thank you. I'd like to walk you through (quickly) the time of events. Our 2013 AGI (married, filing jointly, including income AND IRA distribution) will be right around $186,000 putting us in the 28% federal tax bracket?

NPVAdvisor :

just a sec and I'll show you that table

NPVAdvisor :


  • 10% on taxable income from $0 to $17,850, plus

  • 15% on taxable income over $17,850 to $72,500, plus

  • 25% on taxable income over $72,500 to $146,400, plus

  • 28% on taxable income over $146,400 to $223,050, plus

  • 33% on taxable income over $223,050 to $398,350, plus

  • 35% on taxable income over $398,350 to $450,000, plus

  • 39.6% on taxable income over $450,000.

NPVAdvisor :

SO, yes, DO remember the exemptions and itemized aor standard deduction, but more than likely, you still fall into the 28%

Customer:

Yes, that AGI includes the standard deduction. Assuming we have the appropriate taxes withheld from our income so that we do not owe anything at the end of the year, we would owe the 28% tax on the IRA portion of "income" which would be $27,440. After applying the adoption tax credit of $25,940 that would leave a balance of $1,500 that we would owe the fed?

NPVAdvisor :

One more thing (the 10% penalty) $2,744

NPVAdvisor :

BUt yes you have it

Customer:

Yes, I have not forgot about the 10% penalty. Wouldn't the 10% penalty be taken from the principal distribution amount? 9,800? (based on distribution of $98,000)

NPVAdvisor :

Whatever amount comes out of that IRA shell, so to speak, (in a given tax year, you can always distribute some this year and some next) is what's used to calculate the penalty .. so it's calculated on whatever amount is pulled from the IRA - AS LONG AS the money contributed was all pre-tax...Now, if come of the money was after tax contributions, the money is taxed as interest (growth) out first.... so yes, if, say for example, you liquidate the wholr IRA and 10,000 of that was the original AFTER TAX contribution, then only the amount Over and above the 10,000 is taxed OR penalized

Customer:

All of the funds being pulled out are pre-tax. I'm thinking Fidelity may actually withhold the 10% penalty so that will be taken out before distribution. I could be wrong about that. If they don't withhold it, I need to keep the $9,800 (plus the $2,744 + plus the balance of state tax owed) in the bank. Does that sound right?

NPVAdvisor :

Yes, fidelity with withhold whatever amount you tell them to (it will be a box (withhold taxes) and line (how much) on the form

NPVAdvisor :

But yes, you HAVE IT

NPVAdvisor :

i would have them withhold. That way you won't rund the risk of having an underpayment penalty

Customer:

Awesome. Thanks so much for your help. I wanted to verify all this so I didn't come up owing taxes I wasn't prepared to pay.

NPVAdvisor :

Your welcome ... Sounds like you have your arms around it ... By the way My brother and his wife adopted two boys, and they brought us ALL much joy ... Good luck with everything!

Customer:

The kids have been with us for two years, they have been a blessing to us and our family as well! We finally get to change their last names next month! We are using the old IRA towards a downpayment on a new home (we outgrew our current one). Thanks again :)

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4024
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.


Thanks so much for the rating Angela,


If you'd like to work with ME again just say "For Lane only," at the beginning of your next question.

But again, thanks!
Lane

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