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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22828
Experience:  Taxes, Immigration, Labor Relations
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I AM 52 AND AM ON PERMANENT DISSABILITY. THE FIRM I WORKED

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I AM 52 AND AM ON PERMANENT DISSABILITY. THE FIRM I WORKED FOR FOR 20 YRS DECLARED BACKRUPCY IN 08 AND THE FIRM THAT BOUGHT US DID NOT TAKE 3K EMPLOYESS AND I IN A WHELLCHAIR WAS ONE OF THEM. I ONLY HAVE 401K OF 101K AND HAVE ONLY USE OF LEFT ARM. MAY I CASH OUT THE AMOUNT TO SURVIVE? HAVE A MONTHLY CHECK EACH MO AND I LIVE WITH MY MOTHER. REQUIRE HELP GETTING DRESS AS WELL AS GETTING OUT OF BED AND USE OF BATHROOM.WHAT IS THE TAX AND I BELIEVE AS PERMANENTLY DISSABLED, THERE IS NO 10% TAX. PLEASE TELL ME HOW CAN THE FUNDS BE CASHED OUT? THANK YOU
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Lev :

Hi and welcome to our site!
Sorry for your situation.
First of all - funds in your 401k account - are YOUR money - and you may decide what to do with these funds.
You are correct - if you are disabled - there is no 10% early distribution tax regardless of your age.

Lev :

However - you still need to consider your income tax liability.
When funds were contributed into your 401k - generally they were not included into your taxable income - means your tax liability were deferred. However - when you take distribution - the distributed amount is added to your taxable income.
So - you may want to plan your distribution wisely and avoid large distribution in any single year - by doing that - you will avoid large taxable income and higher tax brackets.

Customer:

I WANT TO GIVE A PORTION FOR A FRIEND AND HER SON. SHE WAS RECENTLY DIVORCED DUE TO ABUSE. WOULD THAT BE A PROBLEM?

Lev :

Under IRS rules - a person is permanently and totally disabled if both 1 and 2 below apply.


1. He or she cannot engage in any substantial gainful activity because of a physical or mental condition.
2. A qualified physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death.

Lev :

After distribution - you may use funds as you wish - these are YOUR money - there is no issues and no problem - and will not affect your income tax liability.
That will considered as gift to your friend.

Customer:

IS HELPING A PERSON IN NEED A HELPFUL GAIN? WOULD THIS BE CLASSIFIED AS A SUBSTANTIAL GAIN? AS TO PHYSICIAN, I HAVE HAD MS AND HAVE DEGRADED OVER THE LAST 7 YEARS.

Lev :

Gift itself - is not taxable income in the US. Please see for reference IRS publication 525 page 31 left column - - http://www.irs.gov/pub/irs-pdf/p525.pdf


Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you.
So your friend will not need to claim that gift on her tax return. There is no any amount limit. That is for income tax purposes. That would be the donor who files form 709 - gift tax return - not recipients of the gift. The gift tax return is required when the total value of the gift is above $14,000 (for 2013) per person per year.
There will not be any gift taxes unless the lifetime limit of $5,250,000 (adjusted every year for inflation) is reached.

Lev :

The "substantial gainful activity" means - working and receiving a compensation for your work.
Having retirement income from 401k is not considered as having a "substantial gainful activity"

Customer:

BY ME GIVING THE AID TO A FRIEND/ " GIFT" , BY ME FILING FORM 709, WHAT WOULD I BE TAXED ON MY 1040? SHE AND HER SON ON ON MEDICAID. SHE WILL HAVE TO FILE I ASSUME BECAUSE AS SOON AS SHE IS STABLE AND SET, SHE ONLY RECEIVES 1200.00 PER MO FOR CHILD SUPPORT.

Lev :

By giving a gift - you will NOT be taxed on form 1040. That is not your income and there is NO income taxes because of gifting.
However - if you gift will be above $14,000 per person per year - you will need to file form 709 - that is a GIFT tax return. There will not be any gift taxes unless the lifetime limit of $5,250,000 is reached.

Customer:

I WISH TO THANK YOU FOR ALL YOUR HELP IN THIS MATTER.

Lev :

You are welcome.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22828
Experience: Taxes, Immigration, Labor Relations
Lev and 5 other Tax Specialists are ready to help you
Expert:  Lev replied 1 year ago.
Hi again.
Appreciate your EXCELLENT rating and the bonus.
I just want to summarize our conversation - so it will be clear.
1.
Funds in your 401k account - are YOUR money - and you may decide what to do with these funds as long as you are separated from the employer who set that 401k plan.
When funds were contributed into your 401k - generally they were not included into your taxable income - means your tax liability were deferred. However - when you take the distribution - the distributed amount is added to your taxable income.
So - you may want to plan your distribution wisely and avoid large distribution in any single year - by doing that - you will avoid large taxable income and higher tax brackets.
2.
You are correct - if you are disabled - there is no 10% early distribution tax regardless of your age. You are not required to be disabled under SSA - while that might be helpful to proof your disability.
Under IRS rules - a person is permanently and totally disabled if both 1 and 2 below apply.
--1. He or she cannot engage in any substantial gainful activity because of a physical or mental condition.
--2. A qualified physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death.
The "substantial gainful activity" means - working and receiving a compensation for your work.
Having income from retirement (such as 401k distribution), investment, rental, etc - is not considered as having a "substantial gainful activity"
3.
You may gift any amount to any person - that is not an issue. That gift doesn't affect neither your tax liability not the tax liability of the donee.
Thus - the gift is not included into donee's taxable income and is not deducted on your tax return.
That is for income tax purposes.
4.
That would be the donor who files form 709 - gift tax return - not recipients of the gift. The gift tax return is required when the total value of the gift is above $14,000 (for 2013) per person per year.
There will not be any gift taxes unless the lifetime limit of $5,250,000 (adjusted every year for inflation) is reached.
So far - if your gift is less than $14,000 per person per year - there is NO gift tax consequences.
5.
I had to mention that if the donee receives any public assistance based on her income level - for instance Medicaid - she would be required to report any income either taxable or not taxable. Thus legally - she would be required to report your gift even it is not her taxable income and is not reported on her tax return.
So potentially - your gift MIGHT affect her eligibility for public assistance.

Please feel free if you need any clarification of further help with other tax related issues.
Customer: replied 1 year ago.


Good morning Mr Lev. Thank you for your help but I wish to have you clarify another tax issue. If I give my friend the $100,000 as a loan, what will be my tax implications this year and what affects will be on her Medicaid?

Expert:  Lev replied 1 year ago.
Welcome back!
Appreciate for asking additional questions.
The loan is not considered taxable income - and is not considered as income for Medicaid eligibility purposes - as long as that is a true loan - means - it is assumed that the loan will be paid back and it is actually paid.
For tax purposes - if the loan has no interest - the imputed interest rules will be in effect.
For example - just for illustration - if you lend your friend $100,000 to be paid back over ten years, and do not charge any interest, the IRS will impute an interest rate on the loan and tax you as if the imputed interest were actually being collected by you as income. For this and some other reasons, it makes sense to charge a minimal interest rate on the loan.
Generally - Applicable Federal Rates (or AFRs) may be used for that purpose.
See here - http://apps.irs.gov/app/picklist/list/federalRates.html
Gifted interest is considered a gift to your friend - while it is not taxable - still must be reported on Medicaid application.
Let me know if any clarification needed.
Customer: replied 1 year ago.

She is on Medicaid and does she have to state the loan? I do not want this to affect her Medicaid which he has had since her divorce. What ramifications are there if she does not inform Medicaid? What amount will I have to pay in taxes? She stated that she would pay me back within 2 years. .

Expert:  Lev replied 1 year ago.
She would be only required to report her income - either taxable or not taxable - and her assets.
The loan is not her income - and will not need to be reported. But again - that should be a true loan - means - it is assumed that the loan will be paid back and it is actually paid.

When the loaned money are on her account - that will be her asset - and must be reported as her asset on Medicaid application.

What ramifications are there if she does not inform Medicaid?
Not informing about assets or income when filing for public assistance - means - providing false information. If the person receives public assistance for which he/she is not eligible - that person will be required to pay back all amounts (or value of provided services).

What amount will I have to pay in taxes?
Your tax liability will be based on your total income and filing status. You may review tax rate schedule on last page on this publication - http://www.irs.gov/pub/irs-pdf/i1040tt.pdf
Customer: replied 1 year ago.


She has been receiving Medicaid since her divorce and she receives only child support for her son. She is trying to get on her feet and she has no family except me her friend.. If I loan her an amount, will her Medicaid coverage be affected? She receives no payments fro Medicaid.

Expert:  Lev replied 1 year ago.

I may not say for sure if her coverage will be affected - but it MIGHT be affected, because the money in her account will be treated as her asset and must be reported.

That will not be her income - because she is obligated to pay the loan back - but as soon as funds are deposited into her account - that will be her asset.

Additional complications comes because each state has its own eligibility rules and while they are similar between states - there are some small differences.

For exact affect on her eligibility - I might suggest to contact her social worker and ask to evaluate possible situation.

Customer: replied 1 year ago.

I AM ONLY LOANING $90,000 AND IT WILL BE RETURNED IN FEB. I WILL PUT IT BACK INTO FIDELITY ACCOUNT THEN. ONCE I RECEIVE IT, WILL BE SENT TO FRIEND. DO I STILL HAVE TO MAKE IT A LOAN? YOU HAVE BEEN FANASTIC AND I WISH TO THANK YOU.

Customer: replied 1 year ago.

I AM ONLY LOAN $90,000 AND IT WILL BE RETURNED IN FEB. I WILL PUT IT BACK INTO FIDELITY ACCOUNT.. . DO I STILL HAVE TO MAKE IT A LOAN? YOU HAVE BEEN FANASTIC AND I WISH TO THANK YOU

Expert:  Lev replied 1 year ago.
Sorry for delay.
If that is a true loan - and it is expected to be paid back - that is a loan - and there is nothing you need to do. What you may want to document the loan by signing a note and keep that note with your records.
As we already mentioned - the loan is NOT a taxable income for the - and it will not be taxable for the creditor when paid back.
If she need a loan for a short period - most likely she will spent it and there will not be any assets in her account - so for Medicaid eligibility purposes - there will not be assets.
Similarly - if she will pay the loan back as soon as the money will come to her account - there will not be any assets left and her eligibility should not be affected.
On the other hand - that amount will be on her bank account which is provided when the person applies for public assistance - and she might need to explain the source and the purpose of these transactions. In this case - a signed note might be helpful.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22828
Experience: Taxes, Immigration, Labor Relations
Lev and 5 other Tax Specialists are ready to help you
Customer: replied 1 year ago.


Mr Lev, can you tell me how to write-up a loan form and state what should be stated?

Expert:  Lev replied 1 year ago.
As that is the loan agreement between close friends - you do not need an attorney and do not need a complicated loan contract.
Here are several sources you may take a loan note template and fill it with your specific details.
Any of these may be used.

http://www.rocketlawyer.com/article/promissory-note-template.rl
http://www.nolo.com/legal-encyclopedia/promissory-notes-personal -loans-family-30118.html
http://apps.suzeorman.com/igsbase/igstemplate.cfm?SRC=SP&SRCN=lendmoney3&GnavID=84&SnavID=121&TnavID=128&from=rc
http://www.expertlaw.com/library/business/promissory_note_form.html
http://www.lawdepot.com/contracts/promissory-note-form/
Customer: replied 1 year ago.


YOUR PATIENCE AND PROFESSIONALISM ARE SECOND TO NONE. THANK YOU. SHOULD THE NOTE BE NOTARIZED?

Expert:  Lev replied 1 year ago.
That is not required.
But that would be good to notarize signatures on the none just in case - the note will be provided to any third party.
You may simply go to your bank and most banks offer free notary service to customers.
Customer: replied 1 year ago.

I DID NOT HAVE TO PAY PENALTY DUETO PERMANENT DISSABILITY HOWEVER TO TAKE OUT FROM 401K, FIDELITY HAS TO WITHHOLD 20% WHICH WILL PAY THE FED TAXES. INSTEAD OF 120K, I WILL BE GETTING 96K AND ONCE I RECIEVE FUNDS BACK, I WILL OPEN A NON RETIREMENT FUND ELSEWHERE.

Expert:  Lev replied 1 year ago.
Please be aware that when you take distribution - it will be taxable regardless how the money are used.
The administrator of your retirement account will issue form 1099R and will sent it to you and to the IRS.
Withholding 20% that you mentioned in NOT your tax liability. The purpose of withholding to cover your possible tax liability.
However your actual tax liability is calculated when you prepare your tax return - and will be based on your total income (including distributions), filing status, deductions, etc.
Whatever you would have withheld for income taxes will be reported on form 1099R and will credited against your tax liability on the tax return.
Because of large additional distribution income - you might be pushed into higher tax brackets - and it is possible that your actual tax liability will be more than 20%.
Please be aware that additional state income tax liability will be in additional to federal.
To reduce your tax liability - if possible it would be better to spread distribution over several years. For instance - take partial distribution in 2013 and another part in 2014. That might help to avoid higher tax brackets.
Customer: replied 1 year ago.


Mr Lev, you are extremely helpful. I had 120k and they kept 20% to pay FEDERAL tax. What will the state be? I take home 2,141.00 after taxes and there is no other income. Each year I donate to salvation army and it totals avg $1,500 for donations. Can you estimate what I will pay for the state? Thank you. Will I have to pay anymore FED taxes? Already took out the 20%. Fidelity representative state that FED doesn't care about your reason. They will pay the tax for me. Is that correct? You cannot put it back because Lehman Brothers doesn't exist. When I get it back, I will happen to open a new investment instrument.

Expert:  Lev replied 1 year ago.

As we already discussed 20% is NOT your actual tax liability related to that distribution - that is a federal income tax withholding to cover possible tax liability - which may be more or less than 20% depending on your situation - and will be calculated when you prepare your tax return.

So if your actual tax liability will be more than 20% - you will have to pay a difference. But if your actual tax liability will be less than 20% - you will be getting a refund.

New York's state income tax rates are between 4% and 8.82%. In your income level - most likely you will pay somewhere between 6.45% and 6.85% - so for raw estimations - we may use 6.5%.

New York City has its own taxes - so if you are in NYC - there will be additional ~3.6% - see rates here - http://www.tax.ny.gov/pdf/current_forms/it/nyc_tax_rate_schedule.pdf

Let me know if you need any help.

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