IRS Tax Tips: Early Distribution and Capital Gains

Taxpayers may sometimes find themselves in situations when they need to withdraw money from their retirement plan early. What they may not realize is that that transaction may mean a tax impact when they file their return.

Here are 10 facts from the IRS about the tax implications of an early distribution from your retirement plan.

1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
2. Early distributions are usually subject to an additional 10 percent tax.
3. Early distributions must also be reported to the IRS.
4. Distributions you roll over to another IRA or qualified retirement plan are not subject to the additional 10 percent tax.
5. You must complete the rollover within 60 days after the day you received the distribution.
6. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
7. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
8. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
9. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
10. There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home (up to $10,000), for certain medical or educational expenses, or if you are totally and permanently disabled.

For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions, see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available  www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

10 Things to Know About Capital Gains/Losses

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss. 

1. Here are 10 facts from the IRS about how gains and losses can affect your federal income tax return.
2. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
3. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.
4. You must report all capital gains.
5. You may only deduct capital losses on investment property, not on personal-use property.
6. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
7. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
8. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2011, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net
9. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
10. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

This year, a new form, Form 8949, Sales and Other Dispositions of Capital Assets, will be used to calculate capital gains and losses. Use Form 8949 to list all capital gain and loss transactions. The subtotals from this form will then be carried over to Schedule D (Form 1040), where gain or loss will be calculated. 

For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax. All forms and publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).