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Give Your Trusts New Life by Decanting Them
Give Your Trusts New Life by Decanting Them 1275 750 smolinlupinco

Creating flexibility within your estate plan using different strategies is worth considering when planning for the future. Because life circumstances can change over time (especially those involving tax laws and family situations), it’s important to use techniques to provide greater flexibility for your trustees. One such method is decanting a trust.

What is decanting?

Decanting usually refers to pouring wine or another liquid from one container into another. In estate planning terms, it means “pouring” assets from one trust into another with modified terms. 

The idea behind decanting is that if a trustee has discretionary power to distribute trust assets among that trust’s beneficiaries, they also have the ability to distribute those assets into another trust.

Depending on the language of the trust and the provisions of applicable state law, decanting may enable the trustee to:

  • Change the number of trustees or alter their powers
  • Add or enhance spendthrift language to protect the trust assets from creditors’ claims
  • Move funds to a special needs trust for a disabled beneficiary
  • Correct errors or clarify trust language
  • Move the trust to a state with more favorable tax or asset protection laws
  • Take advantage of new tax laws
  • Remove beneficiaries

In contrast to assets transferred at death, assets transferred to a trust to receive a stepped-up basis, so they can subject beneficiaries to capital gains tax on any appreciation in value. A potential solution to this problem is decanting.

Decanting can authorize a trustee to confer a general power of appointment over the assets to the trust’s grantor, causing the assets to be included in the grantor’s estate, and therefore, eligible for a stepped-up basis.

Stay compliant with your state’s laws

Many states have decanting statutes, and in some states, decanting is authorized by common law. No matter the situation, it’s essential to understand your state’s requirements. For example, in certain states, the trustee is required to notify the beneficiaries or even obtain their consent to decant a trust. Even if decanting is permitted, there may be limitations on its uses. 

Some states, for example, bar the use of decanting to remove beneficiaries or add a power of appointment, and most states won’t allow the addition of a new beneficiary. If your state doesn’t allow decanting, or if its decanting laws don’t allow you to achieve your goals, it may be possible to move the trust to a state whose laws are more aligned with your needs.

Be aware of tax implications

One of the risks associated with decanting is uncertainty over its tax implications. 

For example, a beneficiary’s interest is reduced. Have they made a taxable gift? Does it depend on whether the beneficiary has consented to decanting? If the trust language allows decanting, is the trust required to be treated as a grantor trust? Does such language jeopardize the trust’s eligibility for marital deduction? Does the distribution of assets from one trust to another trigger capital gains or other income tax consequences to the trust or its beneficiaries?

Create more flexibility in your trust with Smolin

If you want to create more flexibility with an irrevocable trust or have any questions about the tax implications of your situation, contact us for more information. 

Understanding Deferred Taxes
Understanding Deferred Taxes 1275 750 smolinlupinco

Navigating deferred taxes can be a confusing process, and the accounting rules for reporting deferred taxes can sometimes seem arbitrary and nonsensical when viewed through the lens of real-world economics. Here’s a brief article to help simplify this complex subject.

What are deferred taxes?

Companies are required to pay income tax on taxable income as defined by the IRS. On their Generally Accepted Accounting Principles (GAAP) financial statements, however, companies record income tax expense based on accounting “pretax net income.” 

In any particular year, your taxable income (for federal income tax purposes) and pretax income (as reported on a GAAP income statement) may differ substantially. Depreciation expense is typically the reason for this temporary difference.

The IRS allows companies to use accelerated depreciation methods to lower taxes that are paid in the early years of an asset’s useful life. Many companies may also choose to claim Section 179 deductions and bonus depreciation for the year an asset is put into service. 

An alternative route that many companies take for GAAP reporting purposes is to use straight-line depreciation. At the beginning of an asset’s useful life, this typically causes taxable income to be dramatically lower than GAAP pretax income. That said, as the asset gets older, this temporary depreciation expense is reversed. 

Understanding differing depreciation methods

Using differing depreciation methods for tax and accounting purposes causes a company to report deferred tax liabilities. In simple terms, this means that by claiming higher depreciation expense for tax purposes than for accounting purposes, the company has momentarily reduced its tax bill but must make up the difference in later tax years. 

Deferred tax assets can come from other sources like operation loss carryforwards, tax credit carryforwards, and capital loss carryforwards.

How should deferred taxes be reported on financials?

When a company’s pretax and taxable incomes differ, it is required to record deferred taxes on its balance sheet. 

This can go one of two ways. If a company pays the IRS more tax than an income statement reflects, it records a deferred tax asset for the future benefit the company is entitled to receive. If the opposite occurs and the company pays less tax, it must record a deferred tax for the additional amount it will owe in the future.

Like other liabilities and assets, deferred taxes are classified as either current or long-term. 

No matter their classification, though, deferred taxes are recorded at their cash value (that is, with no consideration of the time value of money). Deferred taxes are also based on current income tax rates. The company can revise its balance sheet, in which case change flows through to the income statement if tax rates change.

Unlike deferred tax liabilities which are recorded at their full amount, deferred tax assets are offset by a valuation allowance that reflects the potential of an asset expiring before the company can utilize it. Determining the amount of deferred tax valuation allowance to log is at the discretion of management is highly subjective. It’s important to note that all changes to this allowance will flow through to the company’s income statement.

Today, or later on down the line?

For financial statement users, it’s critical not to lose sight of deferred taxes. A company with significant deferred tax assets may be able to reduce its tax bill in the future and save much-needed cash on hand by claiming deferred tax breaks. 

On the other hand, a company with considerable deferred tax liabilities will have already taken advantage of tax breaks and may need additional cash on hand to pay the IRS in future tax years.

Questions? Smolin can help 

Still unsure of how deferred taxes might affect your business? If you would like to discuss any of these issues or gain a better understanding of tax rules for businesses, our CPAs can help. Contact us to get started. 

NJBIZ Leaders in Finance Paul Fried

Paul Fried Selected as an NJBIZ Leader in Finance
Paul Fried Selected as an NJBIZ Leader in Finance 1200 628 smolinlupinco

Smolin is pleased to announce that Paul Fried, CEO-elect, has been selected as an NJBIZ Leader in Finance. NJBIZ Leaders in Finance recognizes financial executives whose passion and energy help drive their company’s success. Honorees are selected ​​because of their professional and civic engagement and their innovative contributions to their fields. They will be recognized at a ceremony on April 25, 2023. 

“Paul has been an instrumental team member at Smolin since he joined our family” shares Ted Dudek, Managing Member of the Firm. “His work for clients over the years has been impactful at all levels. His contributions to both Smolin and our community make him well-deserving of this honor.”

As a New Jersey Certified Public Accountant with over 40 years of industry experience, Fried has a long history at Smolin. He works with clients in the construction, real estate, manufacturing, distribution, and professional services industries and advises on tax matters, forensic accounting, and mergers and acquisitions.  

Paul currently serves on Smolin’s Executive, Merger and Acquisition, Finance, Strategic Planning, and Wealth Management committees. Fried is also a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accounts. 

About NJBIZ Leaders in Finance awards

NJBIZ Leaders in Finance is conferred by NJBIZ, a publication of Bridge Tower Media. A description of the selection methodology is available here. 

Following an open nomination period, honorees are chosen by a panel of independent judges with experience in the financial field. The award categories include banking, corporate, investment, and professional. Selections are based on the nominees’ involvement in their industries and communities, their professional achievements, and innovative ideas. 

About Smolin 

Since 1947, Smolin has been committed to providing industry-leading professional financial and accounting services uniquely designed to meet the needs of each and every client. Smolin’s attention to the needs of each client has helped them become the successful and respected

state income tax nexus

State Income Tax Nexus: What You Need to Know
State Income Tax Nexus: What You Need to Know 956 562 smolinlupinco

Supreme Court precedent once prohibited states from collecting sales tax from out-of-state businesses lacking an in-state physical presence, no matter how much the company made in sales—but this has recently changed. 

With the United States Supreme Court decision in South Dakota v. Wayfair, Inc., individuals and businesses that sell products out of state are liable to pay the states where they sell their products taxes if they reach a certain income threshold for their sales.

If you are selling products out of state, you may be liable to pay taxes on those sales even if the amount of money you received for them is relatively small. 

Which activities of an out-of-state seller constitute Income Tax Nexus? 

There is some amount of protection for those who sell products out of state, as federal law protects those who sell physical items out of state from taxation if they meet the following criteria: 

  1. The only activity within the state is soliciting sales of tangible personal property 
  2. Sales are approved by the home office outside of the customer’s state
  3. The tangible personal property is shipped to the customer from outside of the state

Need assistance? Contact us. 

If you’re unsure whether or not you need to pay taxes on your out-of-state sales, Smolin can help. Let us walk you through the process so you don’t have to second guess anything this tax season.

Smolin Lupin 75th Anniversary

Smolin, Lupin & Co., LLC Celebrates 75 Years of Excellence
Smolin, Lupin & Co., LLC Celebrates 75 Years of Excellence 1600 837 smolinlupinco

Smolin Lupin, an Independent Member of the BDO Alliance USA and one of the NJBIZ Top 20 Public Accounting Firms in New Jersey, is celebrating 75 years of excellent accounting services helping clients achieve success. 

Since 1947, Smolin Lupin has been dedicated to developing long-lasting client relationships by providing professional financial and accounting services uniquely designed to meet the needs of each and every client. 

Smolin is known for helping clients and businesses grow through quality tax, accounting, and advisory services. Smolin helps clients meet their financial goals, and their innovative tax and accounting services have helped countless businesses grow and thrive in the always-changing market. 

“We’re proud of the past 75 years of Smolin, and we thank our incredible team, loyal clients, and the adaptability of the business as a whole,” says Smolin Member of the Firm and member of Smolin’s Executive Committee Henry Rinder.

Smolin’s roots take them back to Newark, New Jersey, servicing a core clientele of private, closely held businesses and professional firms. They helped grow what used to be small businesses and start-ups into medium-sized firms and large corporations. 

As they helped their clients grow, they continued to grow themselves, evolving into a full-service accounting firm with offices in Fairfield, Red Bank and Spring Lake Heights, New Jersey, and Juno Beach, Florida.

With their continued growth—and exceptional personnel—Smolin now offers a complete menu of traditional services from tax planning and preparation, audits and assurance, to specialized services, which include litigation support, forensic accounting, business consulting, estate planning, business valuations and much more. They’ve expanded to serve clients in various industries including (but not limited to) professional services, healthcare, hospitality, non-profit organizations, real estate development, and technology. 

But one thing has remained constant in Smolin’s 75 years of business: their commitment to offering clients the knowledge and expertise to help their businesses grow and thrive. Through their many years of experience and active service with their clients, Smolin’s team brings expertise to advise clients on key issues regarding their respective industries. 

“I’m excited about the future of our organization, and seeing the next levels of what’s to come—and how the future will help Smolin grow into even higher levels of excellence,” says Ted Dudek, Smolin President and Managing Member of the Firm. 

Which Vehicles Are the Most Tax-Friendly for Business Owners?
Which Vehicles Are the Most Tax-Friendly for Business Owners? 850 500 smolinlupinco

If your business is preparing to replace a vehicle or buy a new one, you should know that a heavy SUV might provide a more substantial tax break this year than what you’d receive from a smaller vehicle. 

The reason? Larger business vehicles are depreciated differently on your tax returns than smaller ones. 

Depreciation guidelines

Compared to other depreciable assets, business vehicles are subject to more restrictive tax depreciation rules. 

Depreciation deductions are automatically capped under “luxury auto” rules. If a taxpayer decides to use Section 179 of the Internal Revenue Code to expense all or part of the cost of a vehicle, these caps can apply here as well, allowing an asset to be written off in the year it’s placed into service. Included in these rules are smaller trucks and vans built on truck chassis. 

For most vehicles that are subject to these caps and begin service in 2023, the expensing deductions or maximum depreciation are as follows:

  • First tax year in recovery period – $22,200
  • Second tax year – $19,500
  • Third tax year – $11,700
  • Every subsequent year – $9,960

Typically, this extends the number of years it takes to depreciate the business vehicle completely. 

Caps on deductions

Caps on expensing deductions and annual depreciation for passenger vehicles don’t apply to trucks or vans that weigh more than 6,000 pounds. This rule also includes large SUVs, which can sometimes cost over $50,000, so from a tax timing perspective, you may be better off replacing your business vehicle with a heavy SUV to avoid the restrictions on smaller cars.

In most instances, you’ll have the ability to write off a substantive amount of the cost of a heavy SUV that’s used for business purposes by taking advantage of the bonus and regular depreciation beginning from the year you put the vehicle into service. Bonus depreciation is currently available at 80% but will be reduced to zero over the coming years.

If you opt to expense all or part of the cost of a heavy SUV using Section 179, it’s essential to be aware that as of 2023, an inflation-adjusted limit of $28,900 (up from $27,000 in 2022) applies separately from the caps listed above. 

Please note that for all assets you elect to expense in a year, there’s an aggregate dollar limit that applies. Once you’ve completed the expensing election, you’ll need to depreciate the rest of the cost under the standard rules without regard to annual caps. 

It’s also important to be aware that the tax benefits listed above are subject to adjustment for non-business use. Additionally, the vehicle won’t be eligible for expensing if the business use of the SUV doesn’t exceed 50% of total use, meaning it would be required to be depreciated on a straight-line method over a period of six tax years.  

Trust your tax questions to Smolin

If you have questions or would like assistance with your tax return, the CPAs at Smolin can help. Contact us for more information about how to get the most tax write-offs from your company vehicle this tax season.

What You Need to Know About Claiming Losses on Depreciated Stock
What You Need to Know About Claiming Losses on Depreciated Stock 1275 750 smolinlupinco

Do you own stock in a company whose shares dropped sharply in value or even became worthless after you purchased them? You may be tempted to simply put it behind you, but it’s important to remember that you can claim a capital loss deduction on your next tax return.

Here’s what you need to know about the rules that come into play when a stock you own is sold at a loss or loses all of its value.

Capital losses produced by stock sales

Whenever you sell stocks, they become either capital gains or capital losses. When filing your taxes, any capital gains and losses must be netted against each other based on whether they’re short-term (owned for one year or less) or long-term (owned for one year or more).

If you have short-term or long-term losses (or both) after netting, you can use these losses to offset a maximum of $3,000 of income or $1,500 for married taxpayers who choose to file separately. Any loss you incur over this limit carries over to later years until the entire amount is offset against capital gains or deducted against ordinary income. If both partners have net short-term and net long-term losses, the short-term losses will offset income before the long-term losses are utilized.

If you’ve earned capital gains during the year from selling stock or other assets, it may be wise to consider selling a portion of your losing assets to offset the cost of these gains. Selling enough of your losing assets to cover earlier gains and create a $3,000 loss is an excellent strategy for saving money when you file taxes.

Understanding the wash sale rule 

You may want to sell a stock now to lock in a tax loss even if you believe the stock will recover in the future. According to the wash sale rule, if you sell a stock at a loss and repurchase identical stock within 30 days of your sale date, you cannot claim your loss when you file your taxes.

What to do with worthless stock

If you own a stock that has become completely worthless, you can claim a loss equal to your basis in the stock. This amount is typically what was initially paid for the stock and is treated as though you’ve sold on the last day of the tax year, which is essential to note as this date decides if your loss is categorized as short-term or long-term.

When stocks have no liquidation value, they become worthless—this is due to the corporation that issued the stock having liabilities that outweigh its assets and no reasonable chance of becoming profitable in the future. A stock can still be worthless even if a corporation hasn’t declared bankruptcy. On the other hand, some stocks may still have value after a corporation has filed for bankruptcy, provided that the company is still operating.

If you discover that a stock you owned has become worthless only after you’ve filed your tax return for the year, you can amend your return to claim a credit or refund because of the loss. You can make this claim within seven years of your original return being due or two years from the date you paid.

Dealing with special circumstances when claiming losses

If you’ve been the victim of an investing scam like a Ponzi scheme, you may be able to reduce your losses by availing yourself of special tax relief provided for situations like these.

Trust your tax questions to Smolin

If you’re unsure how to claim your losses this tax season or need assistance with filing, the CPAs at Smolin can help. Contact us for more information about claiming losses on depreciated or worthless stocks.

understanding-after-tax-contributions-roth-401k-and-roth-ira

Understanding After-Tax Contributions: ROTH 401(k) and ROTH IRA
Understanding After-Tax Contributions: ROTH 401(k) and ROTH IRA 1600 941 smolinlupinco

Did you know that when it comes to your retirement account, not all contributions are created equal? Tax implications can have a significant impact on your savings. 

In fact, after-tax contributions to a ROTH 401(k) or ROTH IRA can offer significant tax benefits while traditional 401(k)s and IRAs don’t—just one of many reasons you might choose to include them in your overall plan for saving for retirement.

A bite-sized intro to ROTH 401(k) & ROTH IRA contributions

The phrase “after-tax contribution” means that the money you deposit into a ROTH 401(k) or  ROTH IRA account has already been taxed.

Paying taxes on the funds upfront can be convenient, but you’ll also enjoy several other key benefits: 

  • The opportunity to grow an asset on an after-tax basis and lock in a lower tax rate
  • Tax-free contributions and earnings
  • No income tax on funds withdrawn after you turn 59½ 

While contributions to a ROTH 401(k)/IRA don’t provide any current-year tax benefits, there are other long-term benefits to consider:

  • There are no required minimum distributions (RMDs) from a ROTH IRA
  • If a ROTH IRA is inherited, the new owner(s) are not required to withdraw all funds from the plan within ten years (as they would with a traditional IRA) 

Is a ROTH 401(k) or ROTH IRA right for you?

If you’re not in a high federal income tax bracket and don’t live in a high-tax state, making after-tax contributions to a ROTH 401(k) or IRA could be a good choice for you. You may also find these retirement savings options appealing if you don’t want to worry about income tax bills in retirement.  

If you’re looking for immediate tax benefits, it’s important to note that there are no current-year tax benefits to contributing to a ROTH 401(k) or IRA. Still, the long-term benefits outlined in the previous section can be substantial and are worth considering as part of your overall retirement savings strategy.

Maximum contributions for 2023

If you want to maximize your retirement accounts this year, you might be planning to save as much as possible by contributing large amounts to your ROTH 401(k) and ROTH IRA accounts. However, ROTH 401(k) and IRA contributions are capped by the IRS to prevent employees with higher pay rates from enjoying disproportionate tax savings.

Even if you’re only planning to make modest after-tax contributions to a ROTH 401(k) or IRA, you need to understand the contribution limits for 2023. Contribution limits for ROTH 401(k)s aren’t determined based on your total income, but contributions to ROTH IRAs may be. 

Maximum contribution for a ROTH 401(k) in 2023

For ROTH 401(k)s, the 2023 maximum contribution is $22,500. If you’re over the age of 50, you may also contribute an additional $7,500 catch-up contribution in an effort to reach your retirement savings goals more quickly. 

Maximum contribution for a ROTH IRA in 2023

For ROTH IRAs, the 2023 maximum contribution is $6,500 with a $1,000 catch-up contribution available if you’re over age 50. 

Withdrawing funds from a ROTH 401(k) or IRA

Whether you’re ready for retirement or you want to put your money toward a particularly large expense, you’ll eventually need to withdraw the funds in your ROTH 401(k) or IRA. To maximize your money, timing is everything—as is understanding the individual rules for each type of account.

Withdrawals from a ROTH IRA are penalty-free (and tax-free) after a five-year holding period and after you reach age 59½. If you withdraw before that age, there are no penalties on withdrawals of contributions. However, your earnings from the withdrawal will be subject to federal income tax and a 10% penalty.

Similarly, if you take a hardship distribution from your ROTH 401(k), income tax and a 10% penalty will be applied. However, you may be able to avoid the 10% penalty if the hardship distribution meets one of the exemptions, so be sure to check with your accountant before moving any money. 

Questions? We’re here to help. 

After-tax contributions to a ROTH 401(k) or IRA offer several important benefits to support the growth of your retirement savings, but you might find that navigating the contribution limits, tax implications, and other factors is easier with advice from a professional.

We can evaluate the possible effects any financial decisions may have on your retirement savings, and assist in ensuring that you’re following the guidelines associated with your retirement savings account. Contact us today. 

Understanding the Tax Implications of Merger and Acquisition Transactions

Understanding the Tax Implications of Merger and Acquisition Transactions
Understanding the Tax Implications of Merger and Acquisition Transactions 1600 941 smolinlupinco

As a result of rising interest rates and a slowing economy, last year’s merger and acquisition (M&A) activity decreased significantly. According to S&P Global Market Intelligence, the total value of M&A transactions in North America was down 41.4% in 2022 (compared to 2021). 

But in 2023, some analysts anticipate increased M&A activity in some industries. If you’re thinking about selling or buying a business, it’s important that you understand the tax implications. 

Two approaches to M&A transactions

According to current tax law, M&A transactions can be structured in one of two ways: 

1. Stock/ownership interest

If the target business operates as a C- or S-corporation, a partnership, or an LLC that’s treated as a partnership for tax purposes, a buyer can directly purchase the seller’s ownership interest. 

The option to buy a stock of a C-corporation may become more appealing with the current 21% corporate federal income tax rate, as the corporation will pay less tax while generating more post-tax income. Additionally, any built-in gains from appreciated corporate assets will be taxed at lower rates when sold. 

Ownership interests in S-corporations, partnerships, and LLCs have also become more appealing due to the current individual federal tax rates; the passed-through income from these entities is also taxed at a lower rate on a buyer’s personal tax return. However, it’s important to note that these individual rate cuts will expire at the end of 2025. 

2. Assets

Another option is to purchase the business assets, which may be ideal when a buyer only wants specific assets or product lines. If the target business is a sole proprietorship (or single-member LLC treated as a sole proprietorship for tax purposes), purchasing business assets is the only option. 

Choosing the right option

The right approach to M&A transactions depends largely on the goals of those involved. 

What buyers want

Buyers often prefer to purchase assets rather than ownership interests. This is because, generally, a buyer’s primary goal is to generate enough cash flow from an acquired business to be able to pay any acquisition debt while also providing an acceptable ROI. As a result, buyers tend to be concerned about limiting exposure to unknown liabilities and minimizing post-transaction taxes. 

A buyer can step up—or increase—the tax basis of purchased assets to reflect the purchase cost. When certain assets (such as receivables and inventory) are sold or converted into cash, a stepped-up basis lowers taxable gains. It can also increase depreciation and amortization deductions for qualified assets. 

What sellers want

Sellers generally prefer stock sales for both tax and non-tax reasons. One objective is to minimize a sale’s tax bill, often achieved by selling business ownership interests (corporate stock or partnership or LLC interests) instead of business assets. 

When a stock or other ownership interest is sold, liabilities typically transfer to the buyer. Additionally, any gain on sale is often treated as lower-taxed long-term capital gain—assuming ownership interest has been held longer than one year. 

Buying or selling a business? Contact a financial professional.

Buying or selling a business is a significant transaction with far-reaching impacts. If you’re considering an M&A transaction, it’s important to seek assistance from a professional before finalizing a deal—because after the transaction is complete, it may be too late to get the best tax results. 
That’s where Smolin comes in. Contact us to speak to a knowledgeable tax advisor.

what-you-need-to-know-about-retirement-plan-early-withdrawals

What You Need to Know About Retirement Plan Early Withdrawals
What You Need to Know About Retirement Plan Early Withdrawals 1600 941 smolinlupinco

Retirement plan distributions are typically subject to income tax. If you take an early withdrawal, they may be subject to additional tax penalties. But what defines “early?” 

Generally, it’s when withdrawals are taken out of a traditional IRA or another qualified retirement plan before the plan participant reaches the age of 59½.  These distributions are often taxable and may also be subject to a 10% penalty tax (or 25% if taken from a SIMPLE IRA during the first two years of plan participation). 

While there are ways to avoid that penalty tax (but not standard income tax), the rules can be complicated—which one taxpayer had to learn the hard way. 

Exceptions to early withdrawal penalty tax

Some exceptions to the 10% early withdrawal penalty are only available to taxpayers who take early distributions from traditional IRAs. Other exceptions only apply to qualified retirement plans, such as 401(k)s. 

Exceptions include (but are not limited to): 

  • Medical cost payments exceeding 7.5% of your adjusted gross income
  • Annuity-like withdrawals made under IRS guidelines
  • Withdrawals made from an IRA, SEP, or SIMPLE plan up to the qualified amount of higher education expenses for you or a family member 
  • Withdrawals made by qualified first-time homebuyers of up to $10,000 from an IRA, SEP, or SIMPLE plan

Another exception is the total and permanent disability of the IRA owner or retirement plan participant.  

New court case results in tax penalty

In one court case (TC Memo 2023-9), a taxpayer took a $19,365 retirement plan distribution before reaching the age of 59½ after losing his job as a software developer. Per the U.S. Tax Court, he had a diabetes diagnosis which he treated with insulin shots and other medications.

The taxpayer filed a tax return for the year of the retirement plan withdrawal but did not report the amount as income due to his medical condition. However, the plan administrator reported the amount as an early distribution with no known exception on Form 1099-R, which was sent to the IRS and the taxpayer. 

According to the court’s ruling, the taxpayer did not qualify for an exception due to the disability.  They noted that an individual is considered disabled if they are “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration” at the time of the withdrawal.

Because the taxpayer, in this case, had been able to work up to the year at issue despite the diabetes diagnosis, the $4,899 federal income tax deficiency was upheld. 

Lesson learned: work with a knowledgeable tax professional

As the taxpayer in this case learned, guidance is important when taking early retirement plan distributions. If you’re unsure whether you’re eligible for an exception to the 10% early withdrawal penalty tax, our CPAs can help.

Contact us to consult with a professional today. 

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