From IRA distribution to tax credits, WalletPop experts answer your questions
Jan 14th 2010 1:30PM
Updated Jan 26th 2010 9:26PM
Our home was destroyed by a fire in 2004, and my wife was inside the house and developed chronic bronchitis from smoke inhalation. We built a new home on the same property, but the new home seems to be contaminated. Eventually, my wife had to move out to get away from the irritant.
I began looking for a condominium and found one in late November 2009. I did not have time to start a mortgage application, so I took money out of a traditional IRA with the intention of rolling over that amount within 60 days. In order to get the money to put back in to an IRA, I started refinancing on our house in late December. This took some time, and it was not sufficient to cover the amount I needed.
I had some favorable rates on credit card balance transfers and proceeded to send three balance transfers to my chosen IRA holder.
To complicate matters further, my wife's purse was stolen prior to my issuing the transfers and an identity theft protection service was put into effect. This resulted in the credit card companies holding the balance transfers until they could confirm with us that the transaction was properly authorized.
I calculate that it was 63 days until the deposits were credited. Is there any means to get an extension from the IRS that would allow the deposits to qualify as a rollover?
If not, is there any way to reduce the tax burden on the amount I will have to enter into Gross Income, such as averaging over future years? I must file an estimated tax payment by January 15 in order to avoid penalties when I finish my return. Do the medical problems and theft help with the decision from the IRS?
Answer from Barbara Weltman of the J.K Lasser Institute
When this is not the case, the IRS has the authority to grant an extension on equitable grounds. However, it will usually do so only for failures that are beyond the taxpayer's control. Factors in determining whether to grant an extension include:
- Whether the rollover could not be completed on time because of death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error.
- Whether the funds were used (i.e., the check was cashed).
- Whether the financial institution made an error other than one qualifying for an automatic extension.
- How much time has passed from the distribution.
In one situation, the IRS did not grant a waiver to a person who used the funds as a short-term loan to avoid foreclosure on his home and did not replace the funds for 102 days.
If you want to ask the IRS for an extension, you'll need to make a private letter ruling request, which entails a user fee. You probably want to work with a knowledgeable tax professional for this purpose.
If you want to do it yourself, follow the instructions in Revenue Procedure 2003-16 at www.irs.gov/pub/irs-irbs/irb03-04.pdf and pay the user fee listed in Revenue Procedures 2010-4 and 2010-8 at www.irs.gov/pub/irs-irbs/irb10-01.pdf (Revenue Procedure 2010-4 has a sample letter you can use, along with a list of documents to submit with your request).
If you don't obtain IRS permission for an extension and must include the distribution in income, then you'll want to explore general tax planning strategies. There is no income averaging or special tax break applicable to IRA distributions.
Answer from Bob Meighan, CPA and vice president of TurboTax
However, there is a slight wrinkle in this assumption for 2009. Because of the Make Work Pay credit, your employer may not have taken out enough in taxes. It's not the fault of your employer, but really a result of the tax withholding tables the IRS provides to employers and the fact that you had multiple jobs. Nevertheless, given the information you provided, I would still bet that you have a refund from the IRS.
Here is what I suggest you do to put your mind (and wallet) at ease: Go to TurboTax and select the TurboTax Free Edition to prepare your taxes. It's free to those who have relatively simple returns, and it's easy. It will walk you through your return to ensure you get every deduction and credit to which you're entitled.
In little time, TurboTax will tell you the bottom line. If you do have a refund coming to you, you may consider changing your tax withholdings (Form W-4) with your employer so you have more take home pay each pay period. TurboTax can help you complete this form, too.
For future reference, between now and the end of January, you can get a tax question answered for free at Freetaxquestion.com. Just visit, request a time for call back, and an expert will get back to you with an answer to your question.
My husband is 68, and I am 64. I'm retired, and we sold our home and built on to our children's home. Is there any way to claim our portion of school and property taxes if our home is in our son-in-law's name? Also, any tax credits for children?
Answer from John Ellis,CPA, founder of The John Ellis Company in Long Beach, CA
As for tax credits for children: Five child-related credits are available. Remember in supporting the credits below, you must have documentation supporting all the facts that allow the credit. With all taxing authorities, documentation is the key.
1. Child Tax Credit
(a) Maximum credit for 2009 is $1,000 per child
(b) Credit is phased out when income is $110,000 for joint filers and $75,000 for single or head of household
(c) Child must be under age 17
(d) Child must be a dependent of the taxpayer
(e) Child must live with the taxpayer over ½ of the year
2. Earned Income Credit
(a) Maximum Credit
• One Child: $3,043
• Two Children: $5,028
• Three or more Children: 45% of earnings up to a maximum credit of $5,656.50
(b) Maximum income allowed:
• One Child: $40,463 Joint / $35,463 All others
• Two Children: $45,295 Joint / $40,295 All others
• Three or more: $48,279 Joint / $43,279 All others
(c) The credit has no bearing on the eligibility for welfare payments
3. Child and Dependent Care
(a) Maximum Credit:
• 35% of allowable expenses for earned income not more than $15,000
• Credit is reduced by 1% per $2,000 of earned income to 20% of allowable expenses at earned income of $43,000
(b) Maximum Expense Limit: $3,000 for one child and $6,000 for two or more children
(c) The taxpayer MUST be either an employee, self employed, looking for work or a full-time student (students at online institutions do not qualify)
(d) Child must be under age 13
(e) In the case of separated or divorced parents, the parent must be the custodial parent
(f) Child must live with the taxpayer over ½ of the year
(g) Taxpayer may take a credit for children over 13, a spouse or a parent if they are physically or mentally unable to take care of themselves (special rules apply)
(h) Expenses related to in-home child care providers (sitters) are allowable expenditures; however, the sitters are considered employees of the taxpayer and must report the earnings to the IRS, and the taxpayer must pay payroll taxes and file payroll tax returns on those earnings
(i) Payments to related individuals to the taxpayer are allowed with the following requirements:
• The related individual is considered an employee; thus, (3)(h) applies
• Payments to the taxpayer's spouse or the parent of a qualifying child is not allowed
4. Adoption Expense
(a) Maximum Credit
• Amount of adoption expenses up to $12,150
• No expenses are required for a special needs child. The entire $12,150 is allowed
(b) Credit is phased-out starting at income of $182,180
(c) Child must be under age 18
(d) No age limit restriction if child is physically or mentally unable to take care of himself/herself
5. College Tax Credit
(a) American Opportunity Credit
• First four years of college
• Credit based on education expenses up to $2,500
• 40% refundable
(b) Hope Credit
• First two years of college
• Credit based on educational expenses up to $1,800
• Not refundable
(c) Lifetime Credit
• Any undergraduate, graduate or professional degree courses
• Credit based on 20% of first $10,000 of educational expense
(d) Other Issues
• If the taxpayer pays qualified tuition and related expenses during one tax year for an academic period that begins during the first three months after that tax year, that academic period is treated as beginning during the tax year in which the payment is made (important for the Hope Credit)
• If paid by a student, would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer.
• If paid by a third party (i.e., grandparents) directly to the student's school, it is deemed to be paid by the student.
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