Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.
10-10-2017 05:28 PM
I have a few questions about early IRA withdrawal. I would like to know will I pay tax on the money as income and also pay a penalty for early withdrawal. Do I declare this money as income for the current tax year only? I am planning on using the money to put a new roof on my house - are there any deductions for home improvement?
10-10-2017 06:17 PM
Welcome to the H&R Block community.
So if you withdraw funds from an IRA account before age 59 1/2 then you're correct that you'll be making an early withdrawl. You will owe federal income tax and a 10% early withdrawl penalty, but the account trustee will normally withhold 20% in this scenario so you should be covered. Depending on the overall outcome of your tax return you may or may not have to actually pay the income tax part, but the penalty is a different story.
If this is your first home (you are a first-time homebuyer) then you are exempt from the penalty on the first $10,000 that is used to buy or improve your home. Note that only IRA accounts are eligible for this exemption (401(K) and other types of qualifying retirement accounts are not).
If you do not qualify for the first-time homebuyer exemption then another way that you can avoid the penalty is to withdrawl the money you need in equal installments over a minimum of five years, or each year until you reach age 59 1/2, whichever comes first.
If neither of these exemptions works for you then you can still reduce your penalty with excess withholdings from a job as well as with refundable tax credits.
You only pay tax on withdrawls from a retirement account once. If you withdrawl some funds now, then those funds are taxable income to you now and will be reported on your next tax return. You absolutely do not have to report funds that are withdrawn now on a future tax return later on when you retire.
A new roof does not result in a deduction. Improvements to your home increase your basis in your home and reduce any gain you have from selling for more than your purchase price when you sell later on. You should keep track of the cost of improvements so that you can calculate your basis, but do not report them on your tax return.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)