How to pay taxes on 401(k) spending ... and pig sales
Can a jobless worker get help paying big tax bills? Is a son's sale of his county fair pig considered taxable income? Can a timeshare week donated to a fundraising auction be a tax deduction?...
Can a jobless worker get help paying big tax bills? Is a son's sale of his county fair pig considered taxable income? Can a timeshare week donated to a fundraising auction be a tax deduction?
Those "Ask the Experts" questions on federal taxes get answered this week by Internal Revenue Service specialist Jesse Weller.
QUESTION:I was out of work for seven months last year and used 401(k) funds to pay my bills. I also had a 401(k) loan that was reported as income because I couldn't pay it back. The total of the two was $89,000. I owe a high tax and penalty amount but don't have the money to pay. What options do I have?
ANSWER: Many taxpayers are struggling financially, and the IRS recognizes that. The first option is to set up an installment payment plan (also known as a "payment agreement") with the IRS. Most individuals who owe $25,000 or less in tax, penalties and interest can set up an Online Payment Agreement at www.irs.gov . You can also set up an installment payment plan by mail, using Form 9465 (Installment Agreement Request).
A one-time fee of $105 is charged. If you choose to pay installments through direct debit from your bank account, the fee is reduced to $52.
If you cannot pay in full through an installment agreement, an "Offer in Compromise" (OIC) is another option.
An OIC is an agreement between a taxpayer and the IRS that settles the tax liabilities for less than the full amount owed. Except in special circumstances, an OIC will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement.
Additional information is in Publication 594, The IRS Collection Process.
Q: My 18-year-old son had a high school pig project last year but did not have a job. He received a 1099 from the county fair for the $900 sale of his pig. His expenses were about $1,300, which made it a loss.
He had a second pig that sold at another fair but he didn't receive a 1099. Basically, he broke even with the two pigs. Currently, he is a full-time college student and I claim him on my taxes. Does he need to submit a tax return?
A: Unless I have all the facts and circumstances, I usually cannot say whether a person should or does not need to file a federal tax return. The best I can do is to provide information so you can make the proper determination.
His income from the sale of the pig would be taxable if your son is required to file federal taxes. Single dependents like your son must file a return if any of the following apply:
--His unearned income was more than $950.
--His earned income was more than $5,700.
--His gross income was more than the larger of: $950 or his earned income (up to $5,400), plus $300.
For tax filing purposes, unearned income includes taxable interest, ordinary dividends and capital gain distributions. It also includes unemployment compensation, taxable Social Security benefits, pensions and annuities. Earned income includes salaries, wages, tips, professional fees and taxable scholarships and fellowship grants. Gross income is the total of your unearned and earned income.
A person also must file a federal return if he had net earnings from self-employment that were $400 or more. It does not sound like earnings from the school project would be subject to tax as self-employment income.
For more on filing requirements for dependents, see Publication 501 (Exemptions, Standard Deduction and Filing Information).
Q: My granddaughter is a high school student and member of her school's musical group. They travel extensively and raise funds to help with traveling costs. At their annual auction fundraiser, I donated a week of my timeshare (worth about $1,700). The bid was for $600. Can I write any of this off as a charitable contribution for tax purposes?
A: I do not have good news. The law generally does not allow a taxpayer to deduct a contribution of less than the entire interest in a property. A contribution of the right to use property is less than your entire interest in that property and therefore is not deductible.
For more about this rule, see Publication 526 (Charitable Contributions) under the heading "Partial Interest in Property."
In all cases, you can download IRS forms and publications at www.irs.gov or call 800-TAX-FORM to have them mailed.