The New York State Society of CPAs has asked Congress to consider new legislation that would temporarily waive tax penalties for taxpayers who are forced to make early withdrawals from retirement accounts due to financial hardship caused by the economic crisis.
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The NYSSCPA expressed its concerns about the burdensome 10 percent tax penalty levied on individuals who, often under dire circumstances, need to take early distributions from qualified retirement plans.
“The current economic downturn has caused extraordinarily high levels of unemployment and caused severe and negative impacts that have forced many to withdraw assets from these accounts to meet basic living expenses,” said Gail Kinsella, president of the 28,000-member organization, in a letter to Senator Charles Schumer, D-N.Y. “[The withdrawals] have become the last resort for many taxpayers looking to avoid foreclosure, tax liens and bankruptcy.”
The NYSSCPA is calling for congressional legislation that would enact a number of targeted, short-term exceptions to the 10 percent additional tax as currently enforced by Section 72(t) of the Tax Code.
“The penalty is a double whammy for many who are turning to these monies because they have a tremendous need,” said Steve Valenti of the NYSSCPA Tax Division Oversight Committee.
His group is only seeking the elimination of the extra tax; the original distribution would still be considered taxable income. The NYSCCPA recommended a series of possible circumstances that should qualify for the exception. Those include:
• Payments to prevent foreclosure on a principal residence.
• Payments for a student loan of the taxpayer, their spouse or their child.
• Long-term unemployment (individuals who have exhausted their 26 week basic unemployment benefit on or before the due date, including extensions, of their tax return).
• To pay a federal, state or local tax lien.
• Extent to which a taxpayer is insolvent at the time of distribution (ignoring the amount of distribution).
• As part of a court-ordered bankruptcy payment plan.
• Deemed distribution of a loan under Section 72(p) of the Tax Code, if caused by involuntary loss of employment by layoff or termination.
The group proposed that the exception be retroactive to Jan. 1, 2010 and continue through Dec. 31, 2014.
Congress already permits some special circumstances where the additional 10 percent tax on an early distribution would be inappropriate or unreasonable. Among them are death or disability of the taxpayer, eligible medical expenses, higher education expenses, health insurance premiums for unemployed individuals, a tax levy and first-time purchase of a home.
“The fact that an exception currently exists for one to purchase a home suggests it would be reasonable to provide an exception for one to save their home in a distressed economic climate,” said Kinsella.
Congress has in the past created short-term targeted exceptions to address specific causes of economic distress to taxpayers, such as the HEART Act of 2008, which created an exception for qualified reservists called to active duty, and the Katrina Emergency Tax Relief Act of 2005, which created an exception for victims of Hurricane Katrina and was later expanded to include Hurricanes Rita and Wilma.
“We want to be a very pro-active voice on this critical issue,” said Valenti. “Folks need our help and we hope to raise awareness of this proposal that can help them deal with the circumstances many are enduring right now.”