Six frequently asked questions answered

Jerry Coon, Enrolled Agent

Jerry Coon, Enrolled Agent

The Community Expo, one of my favorite events of the year, occurred last Saturday at Rockford’s senior high school. This was the fifth annual expo as sponsored by the Chamber of Commerce. We have Carl Shook, past executive director of the Chamber, to thank for our expo. Six or seven years ago, he first proposed holding a community expo. In light of the Chamber’s mission to promote area businesses, it seemed like a perfect fit. Carl traveled to other expos being held around the area and initiated the plans to create our own community expo. As so many times happens in Rockford, when we do something, it’s bigger and better. We don’t just duplicate; we improve. The upcoming Relay for Life event is another prime example. Brenda Davis, the current executive director, has kept the ball rolling and keeps adding improvements.

I also thank Dr. Shibler for hosting the expo at the high school. I don’t know how many other superintendents around the state would have been on the floor during the event like Dr. Shibler, helping to make sure all is running smoothly, but I bet it’s a small number. It’s hard to come up with a nicer way to promote business than the Community Expo. It is an excellent venue for citizens of the Rockford area to see the varied services and products available to them.

During the expo, I was asked many questions. I knew the answer to most of them, but there was one question that really stumped me. Fortunately, I belong to an organization, the National Association of Tax Professionals (NATP), that has 14 full-time research specialists on staff just waiting for tax professionals like me to call them. I have never been disappointed in the past by NATP’s research staff and I won’t be disappointed this time either.

Recently, NATP published a list of their top 25 most frequently asked research questions. Six of those happen to be questions that I have asked NATP to provide me with an answer and the documentation to back up that answer.

First, can a distribution from a 401(k) be used to pay tuition or other educational expenses for a dependent and avoid the 10 percent premature distribution penalty? The answer is no. Distributions from IRAs can be used for educational purposes but not a 401(k).

Second, a taxpayer has a principal residence and a lake vacation home. He wants to sell the lake home at a significant profit but use the tax-free exchange rules to defer the tax on the profit. Is this permissible? No, the tax-free exchange rules may not be used for personal use property, such as lake vacation homes.

Third, a retired police officer receives a pension. His health insurance premiums are included in the distribution amounts reported in his 1099-R. Is there a special tax break available for the health insurance premiums? Yes, eligible retired public safety officers can elect to exclude up to $3,000 of those health insurance premiums from their retirement payments.

Fourth, married taxpayers elect to file an extension of time to file their joint return. Subsequently, they decide they would like to file separate tax returns. By filing the joint extension, have they made an election to file a joint return and are now not allowed to file separate? No, they may still file separate returns. If they made a tax payment with the extension request, they can divide up the tax payment in any manner to which they agree.

Fifth, a taxpayer takes distributions from his Health Savings Account to pay for non-reimbursed medical expenses. He receives a 1099 reporting the distributions. Does this amount have to be reported on his tax return? Yes, use Form 8889, Health Savings Account, to report the distributions in Part II. This tells the IRS that the distributions were used for medical purposes and, as such, are not taxable.

Finally, sixth, when a taxpayer takes money out of his IRA, can the money go back into the same IRA or does a new IRA have to be set up? The answer is the dollars can go back into the same IRA or the taxpayer may open up a new IRA. He has 60 days from the date of the original distribution to get the money reinvested. The 60 days is, for the most part, a black-and-white rule. If he misses the 60-day deadline, he will pay tax on the distribution and may also be subject to the 10 percent early withdrawal penalty.

The remaining most frequently asked questions are quite interesting also, but I will leave them for a future Squire article. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.
He owns Action Tax Service on Northland Drive in Rockford.
His e-mail address is jcoon@actiontaxservice.com.

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