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Disability tax exemption from IRA withdraw

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Latest post Fri, Dec 11 2009 12:23 PM by Taxagent. 3 replies.
  • Fri, Dec 11 2009 6:16 AM

    • Pariser
    • Not Ranked
    • Joined on Fri, Dec 11 2009
    • MA
    • Posts 1

    Disability tax exemption from IRA withdraw

    I currently have a dispute with the IRS. I am physically disabled which my personal physician will attest. I have taken a withdrawl from an IRA account I inherited after my mother had passed. The IRS is charging me a significant tax penalty for this withdrawl. I do have a full time job so I am not sure if this negates my tax exemption status.

    Any advise or suggestion on this I would be most greatful!

    Thank you!

  • Fri, Dec 11 2009 8:22 AM In reply to

    • LdiJ
    • Top 75 Contributor
    • Joined on Fri, Feb 20 2004
    • Posts 1,007

    Re: Disability tax exemption from IRA withdraw

    If you have a full time job, then you are not disabled for tax purposes.

    What did you use the money for?

  • Fri, Dec 11 2009 8:26 AM In reply to

    • Kivi
    • Top 25 Contributor
    • Joined on Sat, Jan 1 2005
    • CA
    • Posts 6,363

    Re: Disability tax exemption from IRA withdraw

    As someone who also has an intherited IRA, the 10% early withdrawal penalty does not apply to withdrawals from such an account. In fact, you generally have to take a minimum withdrawal from such an account on an annual basis, even if under age 59.5.  If you are being charged a penalty it is is because you did not report the withdrawal on your tax return for the year in question and did not pay the taxes when due.

    You almost ALWAYS have to pay ordinary income taxes on any IRA withdrawal, unless it's a Roth IRA.  Doesn't matter whether you are disabled or live on Mars. (OK, you might be out of reach of the IRS on Mars.)  About the only exception that I can think of is if the income from the IRA account was the only income you had in that tax year and it was little enough that you would not have otherwise been liable for any income taxes.  Given that you mention that you have a full-time job, I doubt your income was low enough.  If the financial institution sent you a 1099-R, then it was not a Roth IRA.

    I don't know why you think that being disabled exempts you from the payment of income taxes.  I know people on Social Security Disability Income (SSDI) who have to pay taxes on at least some of that income.  I do know that the 10% penalty for an early withdrawal (before age 59.5 years) from a traditional IRA (not inherited) can be waived or not applied when someone is deemed disabled.  But the disabled person still owes ordinary income taxes on the withdawal even if they don't owe the 10% early withdrawal penalty.  If a person making such a withdrawal failed to report it on their tax return for the year in question, then I could see that peson potentially being liable for some significant negligence penalties and interest.

    I suggest that you find a tax pro or attorney to help you with your dealings with the IRS if you are unable to pay all of what the IRS wants.  But, I don't think you are going to get out of this one without some significant financial pain.  Moreover, the next time someone tells you that the disabled don't pay income taxes on certain kinds of income, I suggest that you ask them for the source of their information before submitting a tax return excluding that income, particarly when you received a 1099 reporting it.


  • Fri, Dec 11 2009 12:23 PM In reply to

    Re: Disability tax exemption from IRA withdraw

    What penalty is the IRS asserting? It is really important to know that to figure out what is going on here.

    Several things you need to know. First, assuming this was a traditional (i.e. not a Roth) IRA, then the distribution you received must have been included in your income for the year you received it. There is no circumstance that would allow you to avoid including the distribution in your income and paying tax on it. Moreover, being disabled does not make you "tax exempt." If you are referring to the income tax as a "penalty" or if the IRS is charging you a penalty because you failed to report the IRA income (i.e. a negligence or substantial understatement penalty), then you probably owe what the IRS is asserting.

    However, for an inherited IRA, the 10% early withdrawal tax (what many people call the 10% early withdrawal penalty) for taking a distribution before you reach age 59 and a half does not apply.

    There is also an exception to the 10% early withdrawal tax if you are disabled. But disabled for this purpose means that you must not able to do ANY substantial gainful activity and the condition must be one that will result in your death or be of a long, continued, and indefinite duration. In other words, the fact that you have a full time job means you are not disabled within the meaning of this provision. So, your disability has no impact on the outcome here.

    For a lot more information on the taxation of IRAs, see IRS Publication 590.

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