[JeNNuss]

undefinedLast year when I left my job I took my 401K money in the amount of $9850. I realize I have to pay taxes on this in the amount of $1174 (from tax table) and a penalty (I am unsure of the amount). (Is this penalty after tax?) I have listed this on my 1040A line 11a as an "IRA Distribution" (this was the closest to the 401K). Can I just claim this amount as income? Where should I put the penalty amount and would it be 10% (after tax amount)?

[AtlantaTaxExpert]

JeNNuss:

First, you cannot file this income using Form 1040A; you must use Form 1040.

Second, based on the information provided below, you may or may not owe income taxes on the $9,850 distribution. Those income taxes can be mitigated by your personal exemption and standard or itemized deductions, so it is possible you may not owe any income taxes. :)

However, you will owe the 10% penalty. That is a punitve tax which cannot be mitigated or offset by credits or deductions. :mad:

This 10% penalty can be waived under certain circumstances. I would need to know more details as to why you took the money, what is your current age, etc. before I could determine if you qualify for any waiver. However, the odds for qualifying for the waiver are against you.

Hope this helps!

Atlanta Tax Expert

[JeNNuss]

Thank you Atlanta... I am 35 and originally was going to roll the money over into an investment, but did not because I would be between jobs and also needed to replace my car. (I donated my old car to charity to balance the penalty if possible.)

Also, I have already filed my taxes this year. I used TurboTax and the 1099 distribution form automatically assumed is was rolled over. The software program did not require the penalty ot tax. I assumed I could claim/straighten it out next year. (I just got married and truthfully was going to let my husband take care of this when he does our taxes next year and we file jointly.)

Thanks for your help...

Also... when I called to donate my car, the charity quoted me an amount that my car was worth ($2500). They also said it was up to me what amount to put on my taxes. Since the car needed some work amounting to about $500, I claimed the value at $2000 on my charitable property contributions. Recently while looking online at cars I found that my old car was NOT worth $2500 at all. And then yesterday I received a form from the charity saying that they had sold the car for $150. Am I in trouble for claiming what I thought it was worth, (according to the charity)?

[AtlantaTaxExpert]

JeNNuss:

Regarding to 401K distribution, if the code in Box 7 of the Form 1099-R is a "1", then you should not wait until next year to try to fix this problem. The IRS will notify you later this year that you do owe the 10% penalty, plus interest and possibly a negligence penalty. Better that you amend the return and pay the penalty upfront, if for no other reason than to avoid the interest and penalty noted above.

As for the car donation, if you do the amendment noted above, then it is likely you will have no problem with the claimed donation. While it is a little high, it does not appear to be outrageous. However, if you wait for the IRS to contact you about the 401K deficiency, that may prompt the IRS auditor handling your return to notice the car deduction and start asking questions about that issue as well.

Now, it is possible the IRS will overlook your 401K distribution, especially if the Box 7 code is not a "1" (which stands for "Early distribution, no known exception"). However, if the code is "1", I would bet you next month's paycheck that you will get a deficiency notice from IRS, probably sometime next year.

Hope this helps!

Atlanta Tax Expert

[JeNNuss]

Thanks again for your reply. I wanted to give you some more details so I could be sure... Box 7 is noted as "G". Also, box 2b is checked "total distribution" rather than the other choice "Taxable amount not determined". To explain this further, I had originally planned to put the entire amount into a cd at my bank until I decided where to invest it. So the check was made payable to myself AND my local bank. Maybe it is irrelvelant, but I deposited there into my savings account and it could have "loooked appropriate" to the payers.

As far as the car, unless you think an amendment is necessary, I will leave it as is (unless you think otherwise). On top of all this, I had gross income totaling only around $12,000, if that matters, possibly more likely to be "overlooked" as far as an audit.

I really appreciate your expert tax advice and I look forward to hearing what you think as far as an amendment.

[AtlantaTaxExpert]

JeNNuss:

You may have dodged a bullet. The "G" code indicates an IRA Rollover Transaction, which may stop (or at least delay) the IRS from noticing that you withdrew your 401K money. However, there is an annual report (Form 5498) submitted by IRA custodians that reports the value of the IRA as of the 31st of December. While it is not likely, it is possible that the IRS could be waiting for that report this upcoming December 31st. If they do not receive it, they may realize what happened with your IRA "non-rollover". For this reason, it would be better if you could establish an IRA with an amount of money equal to your 401K distribution, telling the IRA custodian that it is in fact a rollover transaction. That way, if the IRS then comes back and queries you about the 401K distribution, you could shows them the IRA documentation, showing your intent to complete the rollover.

As for the car, no amendment is needed (IMHO). While the car may not have an actual fair market value of $2,000, that claimed amount as an charitable donation is not overtly outrageous. For this reason (and the fact that your income is rather low at $12,000), I think an audit is very unlikely.

Atlanta Tax Expert

[debris sandwich]

I have a similar question. I left my employment mid year and took a distribution from my 401K and ALSO rolled over a portion of it to my Sharebuilder investment account. For the same, I received 2 1099-R statements from my former employer, one coded "1" and one "G." I ended up taking the amount that I rolled over to Sharebuilder out of the Sharebuilder account, but received no 1099-R from them. Should I claim the amount that was rolled over also, or as you noted in the prior post, the "G" may mean I dodged a bullet. Please advise, thanks!

[AtlantaTaxExpert]

Technically, if you withdrew the rolled over amount, you should claim both.

However, if you claim only the amount for the 1099-R with the "1" code, and there is no 1099-R for the second withdrawal, the IRS may never know about it.

Your decision.

[williadn]

In 2004 I took a 401k distribution to help pay the down payment on a new house.

I made a mistake on my 2004 1040 tax filing. (Yes - foolishly I did my taxes myself). I received the 1099 and there was a number "1" in box 7. On line 33 of my 2004 1040 form, I entered a dollar amt. (%10 of the distribution) for "Penalty on early withdrawal of ....". But I didn't pay this penalty. Then I went on to Add that amt. to my income.

I mailed the form. The IRS sent me a notice to say I had errors on my 2004 1040. I should have subtracted that amt. from my income. They fixed the addition error and that was the end of it... I think.

The odd thing is, the IRS didn't question whether I paid the penalty. Should I worry about it now? I have yet to receive a deficiency notice that I have not paid the penalty. This was not a deliberate avoidance, I am just tax illerate.

What should I do?
Thanks.

[AtlantaTaxExpert]

Amend the return and pay the penalty. The IRS WILL get around to noticing your error, and then you will get to pay penalties and interest on top of the 10% early withdrwal penalty. Not good!

[AlsoInAtlanta]

I meant to post this here, but accidentally posted it on main board.

I was forced to resign earlier this year and took a job making about 40% of what I used to. I had to take money out of my 401(k) to pay the rent and other bills a couple times. I paid the 20% tax on this, but I thought it or the penalty was avoidable in a situation like this. Am I correct? What would I need to do to avoid this additional penalty?

Also, I don't know if you can help on this one, but the 401(k) was made primarily in FLA with no state tax. Do I need to pay state income tax on this money now that I am in GA?

[AtlantaTaxExpert]

Depends on the type of bills you paid. Payment of certain medical expenses will allow a waiver of the penalty; also payment of higher education expenses.

Otherwise, the penalty applies.

If you withdrew it while you lived in FL, then GA state tax does NOT apply.

Contact me at [email protected] if you have further questions. I will NOT be able to work on your return prior to the 17 April deadline, so file an extension (Form 4868) with a check for what you think you owe to keep from paying interest and a 5% per month penalty.