[portsurf]

Hopefully a CPA has a quick answer on this...

When you take an early distribution from a pre-tax IRA, is it considered earned income for purposes of figuring tax credits like the child tax credit?

I see nothing on the IRS site that makes it clear one way or another. However, considering the amount distributed was deferred earned income, it stands to reason that it could be considered earned income if you take it out early. Then again, it would not surprise me at all if you had to pay taxes and the penalty but could not use this amount as earned income with respect to your tax credit calculations.

Thanks in advance to those who answer!

[wnhough]

QUOTE,"Hopefully a CPA has a quick answer on this...When you take an early distribution from a pre-tax IRA, is it considered earned income for purposes of figuring tax credits like the child tax credit? "--- I am not a tax expert; Neither IRS EA nor CPA, but just preparing for my IRS EA license exam, in my opinion, it is taxable earned income. As you know, most taxpayeres normally intend to retain their assets in their retirement accts, in this case traditional IRA, until their retirement years, but, due to a variety of reasons, people may sometimes need to distribute their assets in their retirement accts. Before those years. In general, distribution occurin' before the traditional IRA owner reaches the age of 59.5 is subjected to a 10% early-distribution penalty, in addition to any income tax, but the IRS will waive this early-distribution penalty if distributions are used for payin' medical expenses, qualified edu. Expenses, or purchasing the taxpayer's first residence or payin' for IRS levy against the IRA itself.
Even the 10% early-distribution penalty is not applied to amounts that are not subjected to income tax, i.e. distributions of nondeductible IRA contributions or amounts that were in excess of the contribution limit and are then removed from the IRA before the IRA owner's tax-filing deadline (plus tax-filing extensions).
". . . considering the amount distributed was deferred earned income, . . ."--actually that is not defered earned income but just actual taxable earned income for you;defered income means that for instance, you are to provide your service to your customer later for the earned income you have already received from the customer. In this case, you have taken back some of your contributions from the retirement acct. without having any future obligation to be done in the account.
" I see nothing on the IRS site that makes it clear one way or another. However, considering the amount distributed was deferred earned income, it stands to reason that it could be considered earned income if you take it out early. Then again, it would not surprise me at all if you had to pay taxes and the penalty but could not use this amount as earned income with respect to your tax credit calculations.
"---As many tax experts and tax instructors say, IRC includin' TR, rev. proc. Or etc , in many caases, do not have to be quite logical or rational,though, in reality, there are many court cases exist. And However, fundamental principle of the retirement plan of IRA is to retain assets in their IRA until their retirement years for the future. Once IRC says, then that is it! As you said, penalties ARE not tax deductible becaise the IRC says so!!

[portsurf]

Thanks for the reply. What I am looking for is something more definitive... A reference to IRC, IRS publication, a tax case ruling, etc. I really don't want to be guineapig on this matter if it is in unclear tax/legal territory... Thanks again!