Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.
Q: I lost my job last year, and, in need of money, I went ahead and withdrew all the funds from my 401(k), which was a little more than $14,000. I claimed the money on my 1996 tax return. I was wondering if that money can be divided in half, and claimed in equal amounts on my 1996 and 1997 returns in order to make the payment a little bit smaller, easier to make. Also, the reason I left my job was because of a job-related disability. I was declared 25 percent disabled by the Workman's Compensation Commission, and I was wondering if that is good enough to go around the 10 percent penalty fee, or does a person have to be 100 percent disabled in order to take advantage of that?
A: The full amount of the withdrawal must be reported on the income tax form for the year in which you received the funds. There is no election to split it between tax years. However, there are exceptions to the 10 percent early withdrawal penalty, one of which is a distribution by reason of disability. "Disability" is defined as an individual "being unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can result in death, or to be of a long-continued or indefinite duration." Another exception would be if the distribution was made because of separation of service from your employer after you have reached 55 years of age. The penalty provisions for early withdrawal affect only your federal return.
Q: On a long-term capital gain, is 50 percent of the gain excluded from taxation? If not, what is the difference between a long-term capital gain and a short-term capital gain?
A: No, there currently is no exclusion of capital gain income. The advantage of long-term capital gain treatment is, that generally the maximum federal tax is limited to 28 percent. Maryland does not have any preferential tax treatment for capital gain income.
The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.
Readers can find an archive of tax questions answered thus far plus links to other tax information on The Sun's Web site -- www.sunspot.net.
Pub Date: 4/09/97