Did you Take an Early Distribution from Your Retirement Plan?

Tax laws encourages taxpayers to contribute to retirement plans whether it is a plan sponsored by their employer (typically a 401k) or an individual retirement arrangement (IRA). However, taking money out of these retirement accounts before age 59 ½ is considered an early distribution and can have some serious tax consequences in the form of an additional tax of 10% on the taxable part of the distribution.

The taxpayer will receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. If the distribution code in box 7 is a code 1 (early distribution), the taxpayer will need to report the 10% penalty on line 58 of Form 1040.

Received my income tax refund - Now what?

Congratulations on receiving your refund. Now it's time to get your financial house in order. Below are some priorities:

$10,000 reserve fund - You've heard this one many times. Few taxpayers have an adequate emergency fund that could be used for living expenses in the event of a major crisis, like job loss. Having three to six months in a reserve fund is recommended. With $10,000 at least it's a starting point.

Credit Card Debit - Now that the new credit card rules are in place, it's imperative that your credit card debt be managed. A credit card charging 18% interest will be difficult to pay off.

401k - Failure to fund your 401(k) can be like throwing away free money because you could be passing up the employer match. The contribution withheld from your paycheck also reduces your taxable income.

What's New for your 2010 Income Tax Return

Due Date
Even though April 15 falls on a Friday this year, the deadline for your 2010 Form 1040 is Monday April 18. Emancipation Day is a District of Columbia holiday that falls on April 15 so the tax filing deadline for the whole nation is deferred to April 18 . If your return won't be ready by then, you can extend the deadline all the way out to October 17 by filing Form 4868 on or before April 18.

Personal exemption: $3,650 ($3,800 in 2012, $3,700 in 2011)

Standard deduction:
MFJ/QW $11,400 ($11,900 in 2012, $11,600 in 2011)
HH $8,400 ($8,700 in 2012, $8,500 in 2011, $8,350 in 2009)
Single / MFS $5,700 ($5,950 in 2012, $5,800 in 2011)

Maximum Earned Income Credit
$5,666 if 3 or more qualifying children ($5,891 in 2012, $5,751 in 2011, $5,657 in 2009)
$5,036 if 2 qualifying children (from $5,028 in 2009)
$3,050 if 1 qualifying child (from $3,043 in 2009)
$457 if no qualifying child (same)

Income Limits for Earned Income Credit

• Three or more qualifying children and earn less than $43,352 ($48,362 if MFJ)
• Two qualifying children and earn less than $40,363 ($45,373 if MFJ)
• One qualifying child and earn less than $35,535 ($40,545 if MFJ)
• No qualifying child and earn less than $13,460 ($18,470 if MFJ)

Wages Limit
The maximum amount of wages subject to social security tax is $106,800 (same as 2009).

2010 Limits for Retirement Plans

401(k) Plans
Elective deferral limit is $16,500 (same as 2009)
If age 50 or older on December 31, 2010, the limit is $22,000 (same as 2009)

IRA Contribution and Deduction Limit
Contribution limit for a traditional IRA and Roth IRA remains the lesser of $5,000 or taxable compensation.
If the taxpayer is 50 years of age or older the limit remains the lesser of $6,000 or taxable compensation.

Modified AGI Limit for Traditional IRAs
If a taxpayer is covered by a retirement plan at work, the deduction will be phased out if the modified AGI is between:

• $89,000 - $109,000 for Married Filing Joint (MFJ) or Qualifying Widower (QW) - same as 2009
• $56,000 - $66,000 for Single or Head of Household (HH) or Married Filing Separately and did not live with spouse at any time during the year - $55,000 to $65,000 in 2009
• $0 - $10,000 for Married Filing Separately (MFS) who lived with spouse at any time during 2010

Modified AGI Limit for Traditional IRAs
The limit for the spouse of a covered employee is:

• $167,000 - $177,000 for MFJ (up from $166,000 - $176,000)
• $0 - $10,000 for MFS (same as 2009)

Roth IRA Contribution Limits
The Roth phase out range increases to:

• $167,000 - $177,000 (up from $166,000 - $176,000) for MFJ & QW
• $105,000 - $120,000 (same) for single, HH and MFS not living with spouse during the year
• $0 - $10,000 (same) for MFS who lived with spouse at any time during 2010

2010 IRA and Tax Planning Reference Guide

Excellent resource document courtesy of OppenheimerFunds Retirement Services.

Among the topics include:
Page 1

• IRA Deductibility, Contribution and Eligibility Limits
• IRA Contribution Limits
• Roth IRA Eligibility for 2009–2010

Page 2

• Federal Income Tax Rate Schedules

Page 3

• Retirement Plan Limits and Distribution Rules
• Long-term Capital Gains and Dividends Tax Rates

Page 4

• Federal Estate and Gift Tax Schedules
• Retirement Saver’s Credit
• Health Savings Accounts (HSAs)
• Eligible Long-term Care Deductions

Page 5

• Common IRA-related Tax Forms

Page 6

• Education Savings Tax Incentives
• Social Security Schedules