Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 27, 1995 TAG: 9503270010
SECTION: BUSINESS PAGE: A10 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Medium
Q: This year, I will be receiving a lump-sum retirement distribution which I plan to roll over into a qualified retirement fund. Can I receive the lump sum direct to me and then decide which qualified retirement fund or brokerage to put it in, or must this distribution be sent directly to the retirement fund in order for this distribution not to be taxed? If I do receive this directly, how long do I have to put this in a qualified fund without being taxed?
A: An individual can exclude from gross income in the year of receipt certain distributions from qualified plans and IRAs if the distribution is "rolled over," that is transferred, to another qualified plan or IRA within 60 days of receipt of the distribution. The maximum amount of an "eligible rollover distribution" that may be rolled over tax-free can't exceed the portion of the distribution which would be includible in income if there were no income exclusion for rollover, that is the taxable portion.
You can indeed receive the lump-sum distribution yourself, but you need to be aware that, where you as distributee do not elect a direct transfer, the payor of the distribution must withhold 20 percent of the distribution. If you do elect a direct transfer, there is no withholding.
It is important that you be aware that the amount withheld from a distribution - because a direct transfer is not elected - will not be excluded from the gross income on your return unless an equivalent amount is contributed to the transferee plan or IRA within the 60-day rollover period. Failure to do so would mean the 20 percent withholding not rolled over would be included in your taxable gross income and may also be subject to the 10 percent additional tax on early distributions.
In any event, whether you elect a direct transfer or not, the entire eligible (i.e., taxable) distribution must be rolled over within 60 days of receipt of the distribution, or the taxable part not rolled over will be taxed.
-Answered by Terrence Clem of Miller, Morgan, Agee & Clem
Q: My son is now a long-distance truck driver. What forms, credits or deductions should he be made aware of?
I also have another son who works as a home-improvement salesman. He has to go out of town every so often. What forms, credits and deductions should he be made aware of?
A: You do not relate whether your sons are employees or self-employed. This distinction is important for many reasons, but some of the most important ones will be highlighted.
First, this distinction determines which form is used to report business expenses - employees use form 2106 and self-employed persons use a schedule C. Second, an employee's allowable business expenses generally must exceed 2 percent of his adjusted gross income to become an itemized deduction, while each dollar of a self-employed individual's allowable business expense reduces gross income.
Also, an employee pays into the Social Security system through form W-2 wage withholding, with a matching contribution paid by his employer. A self-employed person estimates and pays his Social Security tax through quarterly tax payments and computes the actual liability on form SE in his form 1040. A self-employed person's Social Security liability is roughly equivalent to an employee's withholdings plus his employer's matching contribution.
What constitutes allowable business expenses for an employee is discussed in IRS publication 17, Your Federal Income Tax, on pages 202-223, which ends with a filled-in form 2106 example. IRS publication 334, Tax Guide for Small Business, discusses business expenses for the self-employed throughout and contains a filled-in schedule C example on page 194. These publications are available at many public libraries or can be obtained at the Roanoke IRS office located in the Poff Federal Building.
-Answered by Mary Anne M. McElmurray of Brown, Edwards & Company
by CNB