Tax questions for 2024

[Chentaxreturn2019]

Hi,

Good morning!

my husband and I retired this year, we withdraw certain amount from our annuity retirement account and put in our joint retirement account by mistake.  We were told by our financial company this withdrawal will be treated as ordinary income for 2024 and need to pay 10% tax ( around $6k).

please help to answer our questions below:

1.  Is any penalty for this so called “ordinary income “ since no withholding tax?

2. the taxable income for 2024 will increase a lot due to this mistake withdrawal.  the tax bracket may jump to high one.  Therefore is any way to reduce taxable income for 2024?

3. shall we pay estimate tax on 4th quarter of 2024?
4. We are consider to sell our house in 2025, any things need to be prepared beforehand?

Please help to review our questions and give us comments and suggestions.  Thank you so much!

Mrs. Chen

Any way can help

[KNDavis]

Hi Mrs. Chen,

You don’t mention your ages, but the 10% penalty generally applies to distributions from retirement accounts when the recipient is under age 59.5.  But there are other exceptions to the 10% penalty that may apply, depending on the type of account and your specific circumstances.  One possible exception is when the employee separates from service during or after the year the employee reaches age 55.    There are other exceptions that could apply.  You can find the list of exceptions in this IRS guide.

If the additional income related to the retirement withdrawal causes you to owe federal tax at year end, it may also trigger underpayment penalties.  You can avoid underpayment penalties by paying at least 90% of the tax owed on the return or 100% of the previous year’s tax.  If your income exceeds $150K, then you must have paid in at least 110% of the previous year’s tax to avoid penalty.  The tax payments must be made either in withholding or in 4 equal installments during the year.  I recommend that you check to see if any taxes were withheld from the distribution.  If not, you will want to make an estimated tax payment now or before 1/15/2025 to cover any taxes owed for the distribution and reduce any penalties.  You can read about estimated taxes and how to avoid underpayment penalties in this TurboTax article.

If you sell your house in 2025, there are several things to consider.  If the home has been both yours and your husband’s primary residence for two out of the past five years, you can exclude up to $500K of gain from your taxable income.  You’ll want to have good records of your original purchase price, plus any improvements you made to the home while you lived there.  Here is a link with more information about selling a home.

Thanks for participating in today's Ask The Expert event!

Kimberly, CPA for over 30 years

[K M W]

Hi, Chentaxreturn2019! 

If I understand your question properly, during 2024  you took a distribution from your annuity retirement account and deposited the funds into a different account.. Your question states that you deposited the funds into a joint retirement account - but based on the information in your post, I think you mean that you deposited the funds into a regular joint investment account, NOT a retirement account.  My answer is going to presume that the funds in the annuity account were all pre-tax amounts, and that you did deposit those into a joint investment account that is NOT a retirement account.  

First, if the intention was to roll the funds over from one pre-tax retirement account to a different pre-tax retirement account, you may still have the opportunity to do so, depending on the timing of the distribution.  If you received a distribution from an IRA or retirement plan, you can deposit all or a portion of it into an IRA or another retirement account within 60 days from the distribution. This is called in Indirect Rollover, but it does need to be done within 60 days of the original distribution.  If you are still in that 60 day time period and wish to keep these funds in a retirement plan, you will want to act soon to get the funds into another retirement account.  If you are beyond the 60 days, there is a way to ask the IRS to waive the 60 day rollover requirement if you missed the deadline because of circumstances beyond your control. I am attaching a link to the IRS site that explains these rules, here:  retirement plans faqs relating to waivers of the 60 day rollover requirement . Please review these FAQ to see if you might qualify under for this waiver, although my preliminary thought is that it is difficult to qualify based on the information in the FAQ.

I will continue on with the remainder of your questions, presuming you are beyond the 60 day timeframe and do not meet the rules to request a waiver of the 60 day timeframe.

If the distribution is from a pre-tax retirement account, then the entire distribution will be taxable to you at your ordinary income tax rate. Additionally, if this is an early distribution (distribution before age 59 1/2), it will ALSO be subject to a 10% early withdrawal penalty, unless you meet one of the exceptions to the early withdrawal penalty.  

If there were no withholding on the distribution, you should definitely make an estimated tax payment in the quarter that the distribution occurred in, or as soon as possible if that deadline has passed.  I would recommend making the estimated tax payment based on the income tax bracket you believe you will be in for tax year 2024, plus an additional 10% for the early withdrawal penalty, unless you believe you meet an exception for the 10% penalty.  And, don't forget to also send an estimated tax payment to your state if the amount will be taxable on  your state income tax return as well.

When you ask about reducing current year taxable income, that question is difficult to respond to without knowing your specific tax situation.  General guidance would be to try to accelerate any deductions that you can into the current year, and/or defer income out of the current year into future years.  For example, if you normally itemize deductions on Schedule A, you could look at what charitable contributions you were planning on making in future tax years, and maybe accelerating them to give in 2024 instead of in 2025 or 2026.  With respect to deferring income, for example, if you are working and your employer has a 401k plan, you could increase your current pre-tax contributions to that plan for the last 2 months of the year to the maximum amount allowed (based on plan rules and the amount of your earnings for the rest of the year).  Other than these general guidelines on accelerating deductions/deferring income, I would recommend seeking local expertise to assist in tax planning based on your specific tax situation for 2024.

Finally, with respect to the sale of your home - although we do not know what tax laws will be in place in future years, assuming the current laws remain in place, you will want to make sure you meet the rules to qualify for the Section 121 Exclusion.  If the Section 121 exclusion rules are met, you can exclude up to $250,000 of gain ($500,000 if married filing joint) from your income. These rules are found in IRS Publication 523, located here:  IRS Publication 523 . Details about the Section 121 exclusion are below:  

According to this Publication: to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

I hope the above addresses all your questions!