Nice Try. The tax law discourages taxpayers from tapping retirement savings too early with a 10% early withdrawal tax. The tax law also allows an above-the-line deduction for penalties imposed by banks for closing out a CD or savings account before maturity.
They aren’t the same thing.
A Mr. Martin learned that lesson this week in Tax Court. He was 54 years old when he pulled out $55,976.29 from his IRA. He reported the 10% penalty tax, but then he also deducted it on line 30 of his 1040 as a “penalty on early withdrawal of savings.”
I can see the logic, as it does look like, well, a penalty on an early withdrawal of savings. But that’s not how the Tax Court sees it (my emphasis):
Martin argues that the additional tax imposed by section 72(t) is deductible under section 62(a)(9). We disagree. Section 62(a)(9) provides a deduction for an amount “forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit.” The section 72(t) additional tax is payable to the federal government, not to a “bank” or similar institution listed in section 62(a)(9). Therefore, it is not deductible under section 62(a)(9). Further, the additional tax imposed by section 72(t) is a federal-income tax. Section 275(a)(1) disallows any deductions for “Federal income taxes” (A deduction for certain other taxes, including State income taxes and some other federal taxes, is allowed by section 164(a).).
There was one other problem with the return. He won $1,000 at a casino, an amount arguably below the threshold for which casinos most report gambling winnings on a W2-G. They reported it anyway. Again, the Tax Court:
The casino reported on an information return its $1,000 payment to Martin. Martin argues that, because he earned entries into the lottery by playing slot machines, his gambling winnings should be subject to the $1,200 reporting threshold. Thus, Martin argues, the casino should not have reported the gambling winnings of $1,000 because the payment fell below the $1,200 reporting-requirement threshold for gambling winnings from slot machines.
Martin assumes that gambling winnings that are not reportable on information returns are not includible in gross income. At trial he said that the IRS is “trying to separate the taxation from the reporting when it is undeniably one and the same”. Martin does not see, or refuses to see, the distinction between information-reporting requirements and the imposition of income tax. Whether the casino was required to report Martin’s winnings is irrelevant to the question of whether his winnings are includible in his gross income. The Internal Revenue Code does not exclude a payment from income when the payment is not large enough to require the payor to report the payment on an information return.
A lot of people think that when something doesn’t show up on an information return, it’s tax-free. It just doesn’t work that way.
President Barack Obama will propose a $10-per-barrel charge on oil to fund clean transportation projects as part of his final budget request next week, the White House said Thursday.
Oil companies would pay the fee, which would be gradually introduced over five years. The government would use the revenue to help fund high-speed railways, autonomous cars and other travel systems, aiming to reduce emissions from the nation’s transportation system.
“Oil companies would pay the fee.” Such a kidder, that President. Apparently the oil companies will pay it by planting more carbon-absorbing money trees out behind their refineries.
It’s a credit to misguided persistence that the President is still pursuing high-speed passenger rail, an idea that California is busy proving once again to be ridiculously expensive and impractical. And somehow I’d feel much safer in an autonomous car from Google or Apple than one from the the same government that brings us the IRS.
Scott Hodge, New IRS Data: Wealthy Paid 55 Percent of Income Taxes in 2014 (Tax Policy Blog).
“So while many politicians may argue that the wealthy don’t pay their fair share of income taxes, the data simply does not support that opinion.”
For consumers, the advice that Maryland noted in their press release is accurate: “Taxpayers should carefully review their returns for these issues and should be suspicious if a preparer: deducts fees from the taxpayer’s refund to be deposited into the tax preparer’s account; does not sign the tax return; or fails to include the Preparer Taxpayer Identification number “PTIN” on the return.” I’ll add, if you don’t own a business and see business income on your return, there’s a problem.
Kay Bell, Lesson from IRS hardware failure: Be prepared for the unexpected during tax filing season. The hardware went back on line yesterday afternoon.
Peter Reilly, IRS And The Tea Party – Scandal Enters A New Millennium. Peter observes The TaxProf’s Day 1000 Tea Party Scandal entry.
Keith Fogg, Discharging Late Filed Returns – A Novel but Unsuccessful Approach. “The case shows the creativity that can come into play in the face of very long odds.”
Me, Tax credits for a few vs. business deductions for everyone. I take my battle against cronyism and for conforming Iowa tax law to 2015 federal changes to IowaBiz.com, the Des Moines Business Record Business Professional’s Blog.
TaxProf, The IRS Scandal, Day 1,002. Another supposedly-erased hard drive sought by investigators miraculously reappears.
Megan McArdle, Obamacare’s Cadillac Tax Will Not Survive. The way pieces of the machine keep falling off, you might wonder if it wasn’t very well designed.
Renu Zaretsky, A Budget, Capital, Growth, and Transparency. Today’s TaxVox news roundup covers the Obama oil fee, last night’s Sanders-Clinton debate, and lots more.
News from the Profession. Lying About Your Financial Statements Being Audited Still Frowned Upon (Caleb Newquist, Going Concern).