The Tax Blotter – April 20, 2018
Generally, distributions from are fully taxable, but some payouts may be at least partially exempt from tax. The key rule is that only the portion of a distribution representing deductible contributions and earnings within the IRA is taxable.
Apr. 20, 2018
Generally, distributions from are fully taxable, but some payouts may be at least partially exempt from tax. The key rule is that only the portion of a distribution representing deductible contributions and earnings within the IRA is taxable.
What’s your basis? If you’ve made nondeductible contributions to an IRA, the part of the distribution attributable to those contributions is exempt from tax. For instance, deductions for contributions may be off-limits if your income exceeds the annual threshold. But keeping detailed records is essential to the tax break. In a new case, a taxpayer receiving a $28,000 distribution could only prove a basis of $5,000 for nondeductible contributions, so the remaining $23,000 is taxable (Shank, TC Memo 2018-33, 3/20/18).
Cross-up on payment to ex. A distribution from an IRA pursuant to a divorce is exempt from tax, but you must handle things the right way. The taxpayer in a new case was ordered to pay his ex-spouse $100,000. He withdrew the money from his IRA and then wrote a personal check for $100,000 to her. This didn’t qualify as a tax-free distribution. If the taxpayer had simply retitled the IRA in his ex-spouse’s name or arranged a direct transfer from his IRA to hers, he would have been in the clear (Kirkpatrick, TC Memo 2018-20, 2/22/18).
Technically speaking on tax. The IRS has strict rules concerning “prohibited transactions” from an IRA. If you engage in one of these transactions— like lending the IRA money to someone – you forfeit the tax benefits for IRAs. The entire IRA balance is then taxable. Silver tax lining: In a new case, a taxpayer who had engaged in a prohibition transaction years ago received about $100,000 in funds from his account. Because the account was technically no longer an IRA, he doesn’t owe any tax on the $100,000 distribution (Marks, TC Memo 2018-49, 4/12/18).