Today TaxMama hears from Tom in Oklahoma, who’s had a bad year. “Due to unemployment and high child support payments, I’ve had to draw money from my IRAs. I know the exclusions for penalty purposes…but is there anything else I’m missing to avoid the penalty. For instance, suppose I owe taxes this year because no deductions were taken from my unemployment compensation or the $8,0000 from IRA. How would I pay? From the IRA again? It would be a vicious circle. I’d never catch up.”
Sounds like a tough year!
And it’s bad enough to pay taxes on your money, but penalties, too? Now, that’s a real insult.
You sound like you already know about the usual suspects – the three usual ways to avoid the penalty without buying a home, being old, or dying.
Those three things being paying for health insurance, medical expenses, or education expenses for yourself or your dependents.
Here’s something else you might try – Form 843 Claim for Refund and Request for Abatement
In the explanation box, explain the hardship, and your insolvency, if you are insolvent.
This isn’t really the form to address hardship requests. In fact, I can’t find a form for that at all. Though the Taxpayer Advocate Service (TAS) may have a form to use. But you’re too early in the process to turn to TAS to intervene.
But I do thing there should be new legislation to permit those who are unemployed to avoid penalties for drawing the only money they have, to live on.
Of course, you can wait until you’re finished filing all the tax returns for draws from your depleted IRAs. Then file an Offer in Compromise to request a reduction, at least to the extent of the penalties and the related interest.
You might actually be able to pull that off – unless you have a home with lots of equity, or a lot more money stashed in other retirement accounts.
And remember, you can find answers to all kinds of questions about retirement draws and all kinds of other tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips. Please click on the subscribe link and join us.]
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