Retirement Plan Distributions: Know the Tax Rules
At tax time, age matters. Taxpayers who take distributions from their retirement accounts before age 59½ will generally owe a penalty of 10% of the amount of the distribution. There are exceptions, such as the need to pay documented medical bills (within statutory limits).
One taxpayer, a software developer who was under the age of 59½, took a distribution after losing his job. He claimed to qualify for a disability exception due to having diabetes. However, his diagnosis of diabetes was from a prior year, and he’d been able to treat the condition and work until the year at issue. He didn’t show that his diabetes rendered him “unable to engage in any substantial gainful activity.” On that basis, the U.S. Tax Court upheld the penalty. (TC Memo 2023-9)
Contact your tax advisor for questions about your situation.
Consequences of Unpaid Federal Tax Debt
Seriously delinquent tax debt (SDTD) could put your passport at risk (unless an exception applies). In 2023, SDTD is an unpaid federal tax assessment exceeding $59,000, where a lien has been filed and other remedies have been exhausted. If such conditions exist, the U.S. State Dept. can deny, revoke or limit a passport.
One taxpayer had tax debt exceeding $1.2 million. He argued that the underlying tax bill was improper but didn’t pursue the remedies provided to have the debt reassessed, and the time to do so lapsed. Upon applying for a new passport, the State Dept. denied the request based on IRS notification of his SDTD status. The U.S. Tax Court upheld the passport denial. (160 TC No. 1)
A Proposal to Scrap the IRS
A Republican-sponsored bill, the Fair Tax Act, was recently introduced in the U.S. House of Representatives. It calls for eliminating most federal taxes (including individual and corporate income, capital gains, payroll, and estate taxes) as well as getting rid of the IRS. Those taxes would be replaced with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits.
In a report, the Congressional Research Service (CRS) examined the benefits and pitfalls of such a consumption-based sales tax system. Proponents tout its simplicity, but critics say it would place a greater tax burden on certain people.
The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation, so it is unlikely to see much progress at this time.Click here to read the CRS report. Advantages of Using Direct Deposit for Tax RefundsAre you expecting a tax refund? With tax season officially underway since Jan. 23, 2023, the IRS is encouraging taxpayers to streamline tax filing this year by having refunds directly deposited into their bank accounts. Although some people still like to receive a paper check, they should at least consider the advantages of direct deposit. It’s the fastest way to get a refund, even when filing a paper return. And it eliminates the risk of having a paper check stolen or lost in the mail. For more from the IRS about the advantages of choosing direct deposit, click here.
Also, the IRS has announced that direct deposit may now be used to receive a refund that is based on an amended tax return (filed electronically). Previously, taxpayers who filed Form 1040-X had to wait for a paper check refund. Taxpayers may still submit a paper Form 1040-X and receive a paper check, but direct deposit isn’t available for amended returns submitted on paper. Current processing time for amended returns is more than 20 weeks for both paper and electronically filed amended returns. However, direct deposit eliminates mail time so you can receive any refund you might be owed faster.
Excludable Income from Some States
State relief payments may be excludable from income for most taxpayers, the IRS announced. On Feb. 10, the tax agency said that taxpayers in 21 states can exclude from income certain special relief payments they received from their states, though the rules vary.In the following states, payments made for general welfare or for disaster relief are excludable: AK, CA, CO, CT, DE, FL, HI, ID, IL, IN, ME, NJ, NM, NY, OR, PA and RI. For taxpayers in AK, the exclusion only applies to supplemental energy relief payments received. In addition, taxpayers in GA, MA, SC, and VA must meet certain requirements in order to exclude state relief from income.
Click here for details.
For these issues and all of your tax issues, consult your RWC advisors.