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1042 ez 9. 1042 ez Education Exception to Additional Tax on Early IRA Distributions Table of Contents Introduction Who Is Eligible Figuring the Amount Not Subject to the 10% Tax Reporting Early Distributions Introduction Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. 1042 ez This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. 1042 ez The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. 1042 ez See Publication 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Publication 590, for information about all other IRAs. 1042 ez However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. 1042 ez You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. 1042 ez Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax. 1042 ez If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax. 1042 ez Who Is Eligible You can take a distribution from your IRA before you reach age 59½ and not have to pay the 10% additional tax if, for the year of the distribution, you pay qualified education expenses for: yourself, your spouse, or your or your spouse's child, foster child, adopted child, or descendant of any of them. 1042 ez Qualified education expenses. 1042 ez For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. 1042 ez They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. 1042 ez In addition, if the student is at least a half-time student, room and board are qualified education expenses. 1042 ez The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. 1042 ez The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. 1042 ez The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. 1042 ez You will need to contact the eligible educational institution for qualified room and board costs. 1042 ez Eligible educational institution. 1042 ez An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1042 ez S. 1042 ez Department of Education. 1042 ez It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1042 ez The educational institution should be able to tell you if it is an eligible educational institution. 1042 ez Certain educational institutions located outside the United States also participate in the U. 1042 ez S. 1042 ez Department of Education's Federal Student Aid (FSA) programs. 1042 ez Half-time student. 1042 ez A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled. 1042 ez Figuring the Amount Not Subject to the 10% Tax To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. 1042 ez You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes: Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see Distributions in chapter 7, Coverdell Education Savings Account), The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1042 ez Do not reduce the qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance given to either the student or the individual making the withdrawal, or A withdrawal from personal savings (including savings from a qualified tuition program (QTP)). 1042 ez If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax. 1042 ez Example 1. 1042 ez In 2013, Erin (age 32) took a year off from teaching to attend graduate school full-time. 1042 ez She paid $5,800 of qualified education expenses from the following sources. 1042 ez Employer-provided educational assistance (tax free) $5,000 Early distribution from IRA (includes $500 taxable earnings) 3,200 Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses. 1042 ez Total qualified education expenses $5,800 Minus: Tax-free educational assistance −5,000 Equals: Adjusted qualified education expenses (AQEE) $ 800 Because Erin's AQEE ($800) are more than the taxable portion of her IRA distribution ($500), she does not have to pay the 10% additional tax on any part of this distribution. 1042 ez However, she must include the $500 taxable earnings in her gross income subject to income tax. 1042 ez Example 2. 1042 ez Assume the same facts as in Example 1 , except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. 1042 ez This must be included in her income subject to income tax. 1042 ez The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. 1042 ez Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). 1042 ez She does not have to pay the 10% additional tax on the remaining $800 of her taxable distribution. 1042 ez Reporting Early Distributions By January 31, 2014, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1042 ez The information on this form will help you determine how much of your distribution is taxable for income tax purposes and how much is subject to the 10% additional tax. 1042 ez If you received an early distribution from your IRA, you must report the taxable earnings on Form 1040, line 15b (Form 1040NR, line 16b). 1042 ez Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. 1042 ez See the Instructions for Form 5329, Part I, for help in completing the form and entering the results on Form 1040 or 1040NR. 1042 ez There are many other situations in which Form 5329 is required. 1042 ez If, during 2013, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the instructions for line 58 (Form 1040) or line 56 (Form 1040NR) to determine if you must file Form 5329. 1042 ez Prev Up Next Home More Online Publications
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The 1042 Ez
1042 ez 13. 1042 ez Payment of Taxes Table of Contents How To Make Deposits When To Make Deposits Amount of DepositsSafe Harbor Rule Generally, semimonthly deposits of excise taxes are required. 1042 ez A semimonthly period is the first 15 days of a month (the first semimonthly period) or the 16th through the last day of a month (the second semimonthly period). 1042 ez However, no deposit is required for the situations listed below; the taxes are payable with Form 720. 1042 ez The net liability for taxes listed in Part I (Form 720) does not exceed $2,500 for the quarter. 1042 ez The gas guzzler tax is being paid on a one-time filing. 1042 ez The liability is for taxes listed in Part II (Form 720), except for the floor stocks tax which generally requires a single deposit. 1042 ez How To Make Deposits Electronic deposit requirement. 1042 ez You must use electronic funds transfer to make excise tax deposits. 1042 ez Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). 1042 ez If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make deposits on your behalf. 1042 ez Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. 1042 ez EFTPS is a free service provided by the Department of Treasury. 1042 ez Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. 1042 ez To get more information about EFTPS or to enroll in EFTPS, visit www. 1042 ez eftps. 1042 ez gov or call 1-800-555-4477. 1042 ez Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System: A Guide to Getting Started. 1042 ez Depositing on time. 1042 ez For EFTPS deposits to be on time, you must initiate the transaction at least 1 day before the date the deposit is due (before 8:00 p. 1042 ez m. 1042 ez Eastern time). 1042 ez You will automatically be enrolled in EFTPS when you apply for an EIN. 1042 ez You will receive a separate mailing containing instructions for activating your EFTPS enrollment after you receive your EIN. 1042 ez When To Make Deposits There are two methods for determining deposits: the regular method and the alternative method. 1042 ez The regular method applies to all taxes in Part I of Form 720 except for communications and air transportation taxes if deposits are based on amounts billed or tickets sold, rather than on amounts actually collected. 1042 ez See Alternative method below. 1042 ez If you are depositing more than one tax under a method, combine all the taxes under the method and make one deposit for the semimonthly period. 1042 ez Regular method. 1042 ez The deposit of tax for a semimonthly period is due by the 14th day following that period. 1042 ez Generally, this is the 29th day of a month for the first semimonthly period and the 14th day of the following month for the second semimonthly period. 1042 ez If the 14th or the 29th day falls on a Saturday, Sunday, or legal holiday, you must make the deposit by the immediately preceding day that is not a Saturday, Sunday, or legal holiday. 1042 ez Alternative method (IRS Nos. 1042 ez 22, 26, 27, and 28). 1042 ez Deposits of communications and air transportation taxes may be based on taxes included in amounts billed or tickets sold during a semimonthly period instead of on taxes actually collected during the period. 1042 ez Under the alternative method, the tax included in amounts billed or tickets sold during a semimonthly period is considered collected during the first 7 days of the second following semimonthly period. 1042 ez The deposit of tax is due by the 3rd banking day after the 7th day of that period. 1042 ez For an example of the alternative method, see the Instructions for Form 720. 1042 ez To use the alternative method, you must keep a separate account of the tax included in amounts billed or tickets sold during the month and report on Form 720 the tax included in amounts billed or tickets sold and not the amount of tax that is actually collected. 1042 ez For example, amounts billed in December, January, and February are considered collected during January, February, and March and are reported on Form 720 as the tax for the 1st quarter of the calendar year. 1042 ez The separate account for each month must reflect: All items of tax included in amounts billed or tickets sold during the month, and Other items of adjustment relating to tax for prior months (within the statute of limitations on credits or refunds). 1042 ez The separate account for any month cannot include an adjustment resulting from a refusal to pay or inability to collect unless the refusal has been reported to the IRS. 1042 ez See Uncollected Tax Report in chapter 4. 1042 ez The net amount of tax that is considered collected during the semimonthly period must be either: The net amount of tax reflected in the separate account for the corresponding semimonthly period of the preceding month, or One-half of the net amount of tax reflected in the separate account for the preceding month. 1042 ez Special rule for deposits of taxes in September. 1042 ez See the Instructions for Form 720 for a special rule on deposits made in September. 1042 ez Amount of Deposits Deposits for a semimonthly period generally must be at least 95% of the net tax liability for that period unless the safe harbor rule (discussed later) applies. 1042 ez Generally, you do not have to make a deposit for a period in which you incurred no tax liability. 1042 ez Net tax liability. 1042 ez Your net tax liability is your tax liability for the period minus any claims on Schedule C (Form 720) for the period. 1042 ez You may figure your net tax liability for a semimonthly period by dividing your net liability incurred during the calendar month by two. 1042 ez If you use this method, you must use it for all semimonthly periods in the calendar quarter. 1042 ez Do not reduce your liability by any amounts from Form 720X. 1042 ez Safe Harbor Rule The safe harbor rule applies separately to deposits under the regular method and the alternative method. 1042 ez Persons who filed Form 720 for the look-back quarter (the 2nd calendar quarter preceding the current quarter) are considered to meet the semimonthly deposit requirement if the deposit for each semimonthly period in the current quarter is at least 1/6 (16. 1042 ez 67%) of the net tax liability reported for the look-back quarter. 1042 ez For the semimonthly period for which the additional deposit is required, the additional deposit must be at least 11/90 12. 1042 ez 23%), 10/90 (11. 1042 ez 12%) for non-EFTPS, of the net tax liability reported for the look-back quarter. 1042 ez Also, the total deposit for that semimonthly period must be at least 1/6 (16. 1042 ez 67%) of the net tax liability reported for the look-back quarter. 1042 ez Exceptions. 1042 ez The safe harbor rule does not apply to: The 1st and 2nd quarters beginning on or after the effective date of an increase in the rate of tax unless the deposit of taxes for each semimonthly period in the calendar quarter is at least 1/6 (16. 1042 ez 67%) of the tax liability you would have had for the look-back quarter if the increased rate of tax had been in effect for that look-back quarter, Any quarter if liability includes any tax not in effect throughout the look-back quarter, or For deposits under the alternative method, any quarter if liability includes any tax not in effect throughout the look-back quarter and the month preceding the look-back quarter. 1042 ez Requirements to be met. 1042 ez For the safe harbor rule to apply, you must: Make each deposit timely at an authorized financial institution, and Pay any underpayment for the current quarter by the due date of the return. 1042 ez The IRS may withdraw the right to make deposits of tax using the safe harbor rule from any person not complying with these rules. 1042 ez Tax rate increases. 1042 ez You must modify the safe harbor rule if there has been an increase in the rate of tax. 1042 ez You must figure your tax liability in the look-back quarter as if the increased rate had been in effect. 1042 ez To qualify for the safe harbor rule, your deposits cannot be less than 1/6 of the refigured tax liability. 1042 ez Prev Up Next Home More Online Publications