This past year was the first year that I was fortunate enough to work from my home. Working from my home has been a wonderful change for both personal and professional reasons. The only thing that caused a slight issue was the tax filing changes that I had to endure. The office in my home was now considered a tax deduction. I had to get some help learning how to deduct the things that are allowed on my federal taxes. If you are new to working from home and have a home office, this blog can help you learn what you need to know before tax time rolls around.
For various reasons, owners of individual retirement accounts sometimes withdraw some of the funds early. Unfortunately, there may be an additional penalty assessed in addition to the payment of regular income tax on the distribution. A few penalty exceptions exist, and one of them may apply if a home is purchased or built with funds received from an early IRA withdrawal.
The early withdrawal penalty is intended to provide incentive for IRA owners not to withdraw funds before retirement. The penalty is generally 10 percent of the taxable portion of IRA funds withdrawn before you reach age 59 1/2. The penalty exception for a home purchase applies to first-time homebuyers, but the IRS definition of a first-time homebuyer is rather broad.
You are considered a first-time homebuyer if you owned no interest in a home for two years before buying or beginning construction on a new home. If you are married, your spouse must also meet the 2-year requirement. You are allowed 120 days from the time you withdraw the IRA funds to enter into a sales contract or begin construction. The date of purchase for a new home is the date of the contract and not the date of closing.
Lifetime $10,000 limit
There is a lifetime $10,000 individual limit to the home purchase penalty exception. If you are married, you and your spouse combined may claim a total penalty exception of up to $20,000. Once you have reached your lifetime exception limit for home purchases, any further early withdrawals are subject to the penalty unless another type of exception applies.
Homes for family members
A useful aspect of the penalty exception is that you may provide funding for certain family members to buy a home. You can use an early IRA withdrawal to assist your children or grandchildren in buying a home. Even your parents, or the parents of your spouse, may qualify. If you provide funding for a family member, that recipient must meet the first-time homebuyer requirement of not owning a home for the past two years.
Regardless of which family member you select to assist in buying a home, your own lifetime penalty exception limit remains $10,000. IRS Form 5329 is used to claim an early withdrawal penalty exception. If you don't qualify for an early withdrawal exception, the 10 percent penalty may be entered directly on a designated line on Form 1040.
There are several other early withdrawal penalty exceptions that may be claimed on Form 5329. Contact a CPA like Jeff Baker & Associates, PS for more information.Share
14 December 2015