Non-Cash Donations

Donations other than Cash
Enclosed please find a guide sheet link (based on "Goodwill/ Salvation Army-type estimates") as to the approximate fair market value of various items you may have donated to charities.  It lists a relatively conservative high and low dollar amount you may wish to use as a guide for taking an itemized deduction under the charitable donations section.

What exactly is "Fair Market Value?"  In effect, it is the re-sale value of the item, or what a given buyer would pay for the item in its given state.  This value is based on such issues as its physical condition, its age, and if it has any antique value.

Thus, the difference between the high and low fair market value figures represents the difference in condition of the item donated:

Items that are in good to excellent condition may qualify for the higher figure; while those in fair to poor condition would list at the lower figure.

These donations can add up to a significant itemized deduction, so you should keep this as a handy reference for current and future donations.

IRS Recordkeeping Requirements
In the event of an audit, the IRS can require various types of proof in order for you to qualify for this type of donation.  According to IRS 
Publication 526, Charitable Contributions, you should be prepared to provide 
the following:

• A detailed list of the items donated, and their condition.
• Name and address of organization to which you made the donation.
• Proof of receipt of the items from the charitable organization.

Usually, you provide a list of all items when you make the donation, and the organization will stamp and date this list so you can use it for your tax return.

Any single item you are donating that has a fair market value of $500 or more requires further detail.  You must also state how the item was acquired (bought, inherited, etc.), when it was acquired, how much it originally cost, and the method you used to determine fair market value. Any item with a claimed value of more than $5,000 requires an appraisal that the IRS would deem acceptable.

A Tip To Reduce Your Chance Of An Audit In This Area
If you will be claiming significant deductions for donations other than cash, a copy of the detailed list of items, along with proof of receipt from the charity can go a long way toward heading off an IRS inquiry here, along with any required appraisals. The list does not have to be typed or computerized.  A legible, handwritten, itemized list will do nicely.

GUIDELINES

• You don't have to send in your list of donated items with your return. Simply keep the information with your personal tax records and put the total contribution amount on line 17 of your Schedule A.

• Be sure to get, again for your personal records, a receipt from the charity of your donated goods. The nonprofit won't put a dollar value on this receipt, but it will help you prove that you did indeed donate the property if the IRS later asks.

• If you do make a single noncash gift worth between $250 and $500 (for example, you donate a vehicle), you will need that receipt or a written acknowledgment of your gift from the qualified charitable organization.

• If the total of all your contributed property comes to more than $500, you have to file IRS Form 8283 with your tax return. 

Men's clothing work sheet
	Average price per item low and high		Number of items x price = donation amount
Shirt	$3.00	$14.40	_____ x _____ = _____
Slacks	$6.00	$14.40	_____ x _____ = _____
Sweater	$3.00	$14.40	_____ x _____ = _____
Overcoat	$18.00	$72.00	_____ x _____ = _____
Belt or necktie	$3.60	$9.60	_____ x _____ = _____
Suit	$18.00	$72.00	_____ x _____ = _____
Jacket	$9.00	$30.00	_____ x _____ = _____
Shoes	$4.20	$30.00	_____ x _____ = _____
Total of all donated items:	_____ x _____ = _____

Women's clothing work sheet
	Average price per item low and high		Number of items x price = donation amount
Blouse	$3.00	$14.40	_____ x _____ = _____
Slacks	$4.00	$14.40	_____ x _____ = _____
Sweater	$3.00	$18.00	_____ x _____ = _____
Overcoat	$12.00	$48.00	_____ x _____ = _____
Handbag	$2.40	$24.00	_____ x _____ = _____
Suit	$18.00	$72.00	_____ x _____ = _____
Jacket	$7.20	$30.00	_____ x _____ = _____
Shoes	$2.40	$30.00	_____ x _____ = _____
Total of all donated items:	_____ x _____ = _____

Children's clothing work sheet
	Average price per item low and high		Number of items x price = donation amount
Blouse	$2.40	$9.60	_____ x _____ = _____
Shirt	$2.40	$7.20	_____ x _____ = _____
Dress	$4.20	$14.40	_____ x _____ = _____
Slacks	$2.40	$9.60	_____ x _____ = _____
Jeans	$4.20	$14.40	_____ x _____ = _____
Coat	$5.40	$24.00	_____ x _____ = _____
Sweater	$3.00	$9.60	_____ x _____ = _____
Shoes	$3.00	$10.50	_____ x _____ = _____
Total of all donated items:	_____ x _____ = _____

Household goods work sheet
	Average price per item low and high		Number of items x price = donation amount
Towels	$0.60	$4.80	_____ x _____ = _____
Sheets and pillows	$2.40	$9.60	_____ x _____ = _____
Blanket	$3.00	$9.60	_____ x _____ = _____
Bicycle	$18.00	$78.00	_____ x _____ = _____
Floor lamp	$9.00	$48.00	_____ x _____ = _____
Sofa	$42.00	$240.00	_____ x _____ = _____
Throw rug	$1.80	$14.40	_____ x _____ = _____
Color TV	$90.00	$270.00	_____ x _____ = _____
Kitchen table	$30.00	$72.00	_____ x _____ = _____
Bedroom (double) complete	$60.00	$204.00	_____ x _____ = _____
Total of all donated items:	_____ x _____ = _____

Here are a few handy websites to help you evaluate your noncash items:

• Salvation Army evaluation guides
• Valuation Guide for Goodwill Donors - Goodwill Industries ...
• Usedprice.com contains Blue Book valuations for different categories of noncash donations from television sets and computers to guns, musical instruments, power tools and more. 

Reference: Practice Enhancers, Able & Co., Bankrate

Mortgage Types

Mortgage Types Available to You
Mortgage Calculator
In today's times, whether you are buying a house, or considering refinancing an existing mortgage, deciding which type of a mortgage is best for you can be confusing.  That's because it involves more than just numbers crunching.  You must also make certain decisions and assumptions about which way interest rates will go, how long you will be in the house, and what your tax bracket will be over the life of the mortgage, as well as the present and future tax deductibility of the interest you will pay.

To make matters even more confusing, these quantitative aspects are also linked with certain qualitative issues that need addressing.  How do you feel about having a debt on your head?  Are you a good saver?  Are you a bit of a gambler or are you a serious conservative?

Basically, mortgages can be divided into two main types:  Fixed, and Adjustable Rate.  Within these two categories further division occurs as we shall see.

Fixed Mortgages
By definition, fixed mortgages refer to the fact that the interest rate you will pay is fixed (locked in) over the entire life of the loan.  Thus, no matter how long of a mortgage you have selected, and no matter what happens to interest rates over the years, your mortgage rate will not change–nor will your contracted payment for the mortgage itself.  This is the most prevalent type of mortgage out there.  In 1998, fixed rate mortgages accounted for 76% of all residential-type mortgages.

The main choice in this category centers around the length of the mortgage you want.  Do you select the 30 year?  Or the growingly prevalent 15 year?  These represent the two most common fixed mortgage choices, so we will focus on them.

Obviously, a 15 year mortgage is shorter.  Also, interest rates you will pay on a 15 year are usually a bit lower (1/4 to ½ point lower).  This is because the bank's risk period is halved compared to a 30 year, so some of this risk-saving is passed on to you, the borrower.  However, your monthly payment will be higher since you are paying it off over a much shorter time period.  Thus, a 15 year mortgage is more of a "forced savings" vehicle than a 30 year, and you build up house equity faster by paying more each month.

Add to this the fact that all mortgages are "front-loaded" (meaning more of your early payments go toward interest instead of principal), and you can conclude that a 15 year mortgage will save a considerable amount of total interest over the life of the loan.  In fact, you have probably seen the bank advertisements comparing the difference in total interest saved, and it appears staggering.  So this is definitely the way to go by a large margin, right?

Not necessarily.  This is where two of the variables we suggested earlier come into play. The first variable is your income tax bracket.  Since the current federal tax codes allow you to deduct mortgage interest paid on a residence (up to a $1 million acquisition mortgage), the rate of your tax bracket can narrow the gap between the total payments of a 15 and 30 year mortgage.

Why?  This is because the higher your projected tax bracket, the more interest you may be able to deduct.  That means the 30 year mortgage creates larger tax deductions, which is a form of savings to you.  Thus, while you are paying a larger absolute amount of interest on a 30 year mortgage, you may not always be paying a great deal more in after tax dollars.

Second, what will you do with the difference in monthly mortgage payment amounts between a 15 and a 30 year mortgage?  Will you invest it?  And if you do, will you do it successfully?  If you can answer Yes to both of these questions, you can narrow the gap even further between the two choices.  In fact, if you were successful enough as an investor, you may even make enough on the invested differential to offset ALL the savings on a 15 year fixed mortgage.  So while the 15 year mortgage creates a quicker equity build-up than a 30 year, the two issues of your tax bracket, and what you will do with the monthly mortgage payment differential are the critical factors.

Note:  We will not address the other two important issues of liquidity value, and portfolio diversification in comparing the two types of mortgages, although these factors have real value to many people, both in quantitative terms, and psychological comfort as well. However, entire books can be written on these two issues alone.

As a point of interest, most 30 year mortgages allow you to make extra payments periodically.  This can create almost the same result as having a 15 year fixed without legally committing you to the higher monthly payment.  This may be a good compromise when deciding which type to get.  The "Reverse Laws Of Compounding" show that, by making an extra monthly payment each year on your new 30 year mortgage, you can shave 7-9 years off its payout period, with the current mortgage rate averages. So, if you are considering this with a 30 year mortgage, make sure there are no extra charges if you make any pre-payments on principal.

As you can surmise, there is no simple answer in deciding between a 15 year and a 30 year mortgage. You must know a bit about yourself as a saver, and an income earner projected over the life of the loan. On the other hand, there is one general rule of thumb to consider following, which goes like this:  The lower your tax bracket, and the less disciplined/less successful you are as a saver, the more you may wish to lean towards a 15 year mortgage if you can handle the extra current amount you would be paying on the monthly mortgage.  Everything else being equal, forced savings is better than none at all!

The biweekly mortgage shortens the loan term to 18 to 19 years by requiring a payment for half the monthly amount every two weeks. The biweekly payments increase the annual amount paid by about 8 percent and in effect pay 13 monthly payments (26 biweekly payments) per year. The shortened loan term decreases the total interest costs substantially. The interest costs for the biweekly mortgage are decreased even farther, however, by the application of each payment to the principal upon which the interest is calculated every 14 days. By nibbling away at the principal faster, the homeowner saves additional interest. Remember, however, that you trade lower total interest costs for lower mortgage interest deduction on your federal income tax. Your ability to qualify for this type of loan is based on a 30-year term, and most lenders who offer this mortgage will allow the homebuyer to convert to a more traditional 30-year loan without penalty. Availability is limited on this mortgage, but it can be worth looking for.

What is a 30-year fixed mortgage?
A 30-year fixed mortgage is a loan whose interest rate stays the same for the duration of the loan. For example, on a 30-year mortgage of $300,000 with an interest rate of 5.75%, the monthly payments would be about $2,357.39. So, the interest rate of 5.75% stays the same for the life of the loan.

Who should get 30-year fixed mortgages?

People who don't like surprises and those who desire a predictable, fixed deduction from their monthly budget are well-suited for 30-year fixed mortgages. It's also attractive to people who plan to stay in the house for more than 5-7 years and desire a mortgage payment spread out over many years so it's more affordable.

What are the advantages and disadvantages of 30-year fixed mortgages?
The pros of a 30-year fixed mortgage: it's a predictable monthly payment; it's a hedge against inflation (the rate is not tied to the index, so it doesn't go up or down); it's relatively simple and maintenance-free (you don't need to worry about rate fluctuation); it provides a tax deduction from the interest you pay on your mortgage; and if rates drop significantly, you can refinance.

The cons of a 30-year fixed mortgage: rates and payments are usually higher than 15-year fixed mortgages and adjustable rate mortgages (ARMs), and if the owner decides to sell the home in less than five years, they could end up paying more interest vs. an ARM.

Adjustable Rate Mortgages
These are exactly what they say.  They are mortgages in which the interest rate you will pay is variable, not fixed; it adjusts according to a certain index the lending institution is using.  Issues such as when the rate changes, by how much it will change, and the maximum amount it can rise are all variables that can differ from one lending authority to another.  These mortgages are nicknamed "ARMs."  Adjustable-rate mortgages (ARMs) are hybrids. They are often advertised as 3/1 or 5/1 ARMs, meaning the interest rate is fixed for three or five years, respectively, and then it adjusts annually. ARMs are usually for 30-year terms. The interest rate consists of the index, which is a general measure of interest rates, and the margin, which is an extra amount added by the lender. 

However, most have similar features you should check out.  First, most adjustables will change their rates according to one of two main indexes or variations thereof:  A formula based on the change in US Treasuries is a very common index; and, the use of the so-called 11th District cost of funds, which is coordinated by the Federal Home Loan Bank Board, is the other main index.

Second, many ARMs have a maximum lifetime "CAP" which means they limit the total amount the interest rate can change.  A commonly used figure here is 6 points over the contracted rate, meaning that if you contracted at 5%, it couldn't go higher than 11%.

However, be careful here because the contract rate for this is usually higher than the initial "Come-on" rate that is frequently advertised.  Again, a common technique lending institutions use to promote these adjustable rate mortgages is to give you a first year's discount on the actual contracted rate. So, you may be paying only 3% in year-one when in fact you have actually contracted for a 5% ARM.  After the first year, your mortgage automatically adjusts upward to the 5% rate, and all loan CAPs may be based on the 5% contract not the 3% starting point.  This is important to know when deciding on fixed vs adjustable, or which ARM to choose from another.

Finally, many ARMS limit the amount they can raise the interest rate to no more than 2 points a year. So, if you contract at an initial 4% rate with a lifetime CAP of 6 points, and a 2 point maximum yearly rise limit, you know that your maximum exposure over the life of the loan is a 10% interest rate.  You also know that it will take until the fourth year to hit the 10% no matter how much, or how fast, interest rates rise.

A variance on this type of adjustable mortgage is called a Hybrid.  The rate is fixed for a certain number of years, then it changes according to what has happened in the open market after that period of time.  A "5/25" for instance means your rate will stay fixed for the first 5 years, then change to a new rate for the remaining 25 years.

So, is an Adjustable Rate Mortgage better for you than a Fixed?  And which type:  a basic ARM, or a Hybrid?  Obviously, for most people it is easier to qualify for an ARM than a Fixed, since one of the qualifying issues most lending institutions use keys off the monthly mortgage amount, and a monthly ARM payment is lower in the beginning than fixed mortgages.

However, here is where you must get out your crystal ball to really decide.  Do you think interest rates(hence your mortgage rate) will stay down, go lower, or rise over the life of your proposed ARM?  Or, if they do change, when will they change?  Will you still own the house by then, or will you have sold it?  So, the issue of how long you plan to keep the house enters into the equation as well.

Are there any guidelines here?  Yes!  First, if you definitely know you will be selling the house in a short time, you can do some numbers crunching to calculate your maximum exposure on an ARM mortgage vs a Fixed.  Conversely, you can figure out where the break-even year is between a lower rate, maximum Capped ARM vs a Fixed if you make some basic assumptions.  Naturally, if you believe interest rates will go down over your expected liability period, an ARM makes sense.

But, if you are planning to stay in the house indefinitely, and you couldn't handle the ARM if it hit its maximum rate, be careful.  There are many people taking out ARMs because they can't qualify for a regular Fixed based on their income levels.  That may be fine in the current interest rate environment, but what happens if interest rates continue on an upward tear?  It could create a serious cash flow problem.

Sources To Apply For Mortgages
BANKS:  The most commonly known places to apply for mortgages are commercial banks and Savings & Loan Associations.  The majority of these institutions serve as initiators and collectors of these mortgages.  They do not keep the mortgage they establish for you.  Rather, they "sell" it off along with others they have made into blocks (or pools) of mortgages.

Because of this type of selling of mortgage blocks (pools), they need common denominators for the pool, so they tend to follow so-called "Fannie-Mae" requirements as to loan qualifying formulas.  They evaluate you in terms of  your income level, any other long-term and short-term debt, the proposed new monthly mortgage payment, house taxes, and house insurance, coupled with your credit worthiness, and the amount of your down payment to determine if you will get the loan.  These are the strictest of loans for which to qualify.

MORTGAGE BROKERS:  Mortgage brokers can be another source, and may be better for those who can't meet the stricter Fannie-Mae rules.  Basically a loan source "middle person," a mortgage broker may represent numerous sources of funds, including individuals, pension plan money, or other exotic sources.

In the cases where the loan sources as represented by this broker do not sell off their loans, it may prove easier to get a loan.  There is more discretion in the qualifying factors.  There may or may not be extra fees associated with getting loans through mortgage brokers, depending on their size and the competitiveness of the market in which you are located.  Also, these mortgage contracts are not as standardized as many large banks, so they should be read with care – every line of fine print.

CREDIT UNIONS:  Some of the larger credit unions offer very good deals on mortgages.  So, those who have a credit union at their job should always check there first.  Special allowances may also be made to members of the credit union as to qualifying formulas.

HOUSING FINANCE AUTHORITIES:  Most of the states have a program along these lines.  Basically these are quasi-independent agencies set up to provide mortgage rate subsidies and/or reduced down payment requirements for the purchase of a residence.  Most of these loans are given to first time home buyers or people who have not owned a home for at least 3 years.

Not everyone can use this program because funds are limited, and there are usually maximum caps on how much income you have, and the price of the home you can buy.  The programs are geared toward low-income, and moderate-income applicants.

Conclusion
It's nice to have choices.  A choice of places in which to apply helps you to get the least expensive mortgage within your selection category.  But, oh what selection category?  What type of mortgage do you choose?  Fixed 30, Fixed 15, Adjustable Rate, or Hybrid?

While the answers require some careful thought, and some serious number crunching to maximize your efficiency of choice, it can be done with the right facts, figures, and assumptions.

Reference: Practice Enhancers, Able & Co., Mortgage Information Service, Zillow

IRS Per Diem Rates for 2013

IRS Per Diem Rates for 2013 
Per diem rates for substantiation of employee lodging, meals, incidental expenses.  Special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. 
IRS Notice 2012-63 contains:

• The special transportation industry meal and incidental expenses rates
• The rate for the incidental expenses-only deduction
• The rates and lists of high-costs localities for purposes of the high-low substantiation method
○ Text of the notice: Notice 2012-63 

The IRS issued the per diem rates that taxpayers can use to reimburse employees for expenses incurred during business travel after September 30, 2012. The high-low per diems for the October 2012 through December 2013 period remain unchanged from last year’s annual update, at $242 for high-cost localities and $163 for all other localities. The list of high-cost localities also remains the same.

Generally, per diem amounts approved by the IRS track the federal per diem rates published by the General Services Administration (GSA) for travel within the continental United States by federal government employees on official business. In August, GSA announced that the 2013 federal per diem rates would be unchanged from 2012.

Per Diem Rates
In lieu of substantiating actual travel-related meal and lodging costs, the IRS provides optional per diem allowances, which employers and employees are deemed to have substantiated by adequate records or other sufficient evidence. The per diem amounts also satisfy the requirement that employees provide an adequate accounting to the employer of meal and lodging expenses.

Incidental Expense
The term incidental expenses has the same meaning as in the GSA federal travel regulations (incidental expenses as fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships.) Transportation between places of lodging or business and places where meals are taken, and the mailing cost associated with filing travel vouchers and payment of employer-sponsored charge card billings are excluded from the GSA definition of incidental expenses. Taxpayers using per diem rates may separately deduct or be reimbursed for transportation and mailing expenses. The per diem rate for the incidental-expenses-only deduction is $5 per day for any locality of travel for post-September 30, 2012 travel, which is unchanged from the previous rate.

Per Diem Rates
Publication 1542 (Rev. October 2011) - Internal Revenue Service

Lump Sum Distributions

Lump Sum Distributions
Tax-saving strategies for Retirement Account Withdrawals
Regarding the issue of lump sum distributions, there are several points that you should be aware of when considering withdrawal of retirement funds. Listed below are some of the pitfalls and some tax-saving strategies that can be explored to maximize your after tax net from the withdrawal, using today's federal tax code.

First, lump sum distributions from IRA's, Keogh plans, 401(k) plans, most company plans, and tax-sheltered annuities, made to persons under 59½, are subject to a 10% penalty (with some exceptions).  The 10% penalty tax on premature retirement-account withdrawals is over and above the regular income tax hit, and it applies unless:

• you are age 59 1/2, disabled, dead, or
• you are 55 and retired, quit, were terminated, or
• you take the money in annuity-like payments over your life expectancy, or
• the money goes for medical bills in excess of 7.5% of your adjusted gross income (AGI), or
• the money is going to your spouse or ex-spouse in a divorce or separation under a qualified domestic-relations order (QDRO) (in which case that person will owe the resulting income tax but no 10% penalty). 

Lump sum distributions are subject to income tax in the year of distribution. Your actual federal marginal tax rate on this distribution could be as high as 35% plus any state income tax that would be due. Because of these severe penalties, care must be taken to plan the best way to withdraw the money.

Some of the ways that you may be able to limit your tax liability on the distribution are:

Rollover distributions
When withdrawing money from any of the retirement plans listed above, you have a window of 60 days from the date of distribution to roll the money over into a new plan. This allows you to avoid the 10% premature distribution penalty, and continue to defer tax on the money.

There are several options available which suit different situations:
1) In the case of someone leaving one employer for another, your company plan must generally be distributed. In this case, the proceeds of the distribution can be rolled into the plan that you are covered under with your new employer (provided the plan accepts rollover contributions). This option allows you to continue to qualify for special tax averaging on the retirement plan upon final distribution.

2) If you haven't found a new job before the 60 day deadline for rollovers, you can set up a separate IRA account specifically for this distribution. Provided you don't co-mingle the original distribution funds with any other contributions, this "conduit" account will allow you to roll these funds later into another qualified plan and still retain special tax-averaging options on this money.

3) Roll all the money into an existing IRA account. If the money is co-mingled with other IRA funds, or if the money isn't rolled into a new qualified plan, you lose the option of special tax averaging, but still retain the tax deferred status on the account.

4) Do a partial rollover. If you need to use some of the money from the distribution, and you are unable to replace all of it before the 60 day deadline, you can still do a partial rollover. This strategy allows you to defer tax and avoid the 10% penalty on at least some of the distribution. Again, because of the severe tax implications, other avenues of borrowing should be exhausted before this option is considered.

However, the manner of the rollover is critical. In the case of lump sum distributions from a company plan, (vs. IRAs, Keoghs, SEPs), employers are required to subtract a 20% backup withholding tax from distributions paid directly to the employee (i.e. you receive a check paid to you). This 20% tax is considered a taxable distribution to you, unless you make it up from other sources and roll it into the new plan. To avoid this problem, you can elect to have the whole distribution transferred directly to the new plan instead of to you.

Annuity Distributions
If you are under 59½ and elect to take the money from the plan, not as a lump sum, but as an annuity, you may be able to avoid the 10% premature distribution penalty.  The IRS permits early retirees to access their retirement funds prior to age 59 1/2 without penalty as long as they take distributions under a plan of substantially equally periodic payments (rule 72t).  Once started, these payments must continue for the longer of 5 years of their attainment of age 59 1/2.  Therefore, once a 72t distribution plan is started, these become required mandatory distributions subject to the early withdrawal penalty if ceased.   Under this arrangement, payments from the plan must be made at least once a year in a series of equal payments over your lifetime, or that of you and your beneficiary. The payments must continue for at least five years or until you reach 59½, whichever comes later. After this time limit has been met, you can elect to withdraw the balance any way you like, including a lump sum of the balance. Note that the payments received are subject to income tax in the year that they are received.

Because annuities require a projected life span, calculations to determine the amount of each payment must be done on an individual basis.

Hardship Cases
There are some circumstances where the 10% penalty may not be assessed on distributions from retirement plans. These are:
1)  Distributions to support you in the case that you become permanently disabled.
2)  Distributions made to settle a qualified domestic relations court order (QDRO)– for example, property settlements in a divorce.
3)  Distributions made to pay for medical expenses exceeding 7.5% of your Adjusted Gross Income.
4)  Distribution for qualified educational expenses or 
5)  Distribution for purchase of a primary residence (you can withdraw up to $10,000 from a traditional IRA or simplified employee pension (SEP IRA) to fund a down payment for a first-time home purchase without incurring the standard 10% early withdrawal penalty, you will still have to pay income tax on the distribution.)

If You were Born After 1935
To compute your tax, you must simply include your lump-sum distribution as ordinary income on page 1 of Form 1040 (on the line for pensions and annuities). The tax impact will be much more acceptable if your overall taxable income would otherwise be negative -- due to personal exemptions, itemized deductions, alimony payments, capital losses, business losses, deductible passive losses, etc. These deductions and losses can offset your income from the lump-sum distribution and may result in a surprisingly low overall tax bill. But this favorable scenario is not very likely. The usual outcome is that the lump-sum distribution gets piled on top of all your other income. This may push you into higher tax brackets.  Plus, the additional income may increase your AGI to the point where the personal-exemption and itemized-deduction phase-out rules kick in.  You may also lose other AGI-sensitive tax breaks. Once again, you may want to consider rolling over your lump-sum into an IRA.

If You were Born Before 1936

Here is where the good news starts. Taxpayers in this age bracket have several options:
• You can report all or part of the lump-sum distribution as ordinary income on page 1 of your 1040. Generally, this is not the best choice for the reasons already mentioned.
• You can use 10-year averaging for all or part of the lump-sum distribution using the 1986 tax rates for single taxpayers.
• For the part of your distribution attributable to pre-1974 plan participation (if any), you can pay a 20% capital gains tax and use either of the preceding methods for the balance. If you have pre-1974 participation, the amount eligible for the 20% tax should be included on the Form 1099-R received from the plan administrator. (Note: The 20% rate on capital gains from lump-sum distributions is in effect under these circumstances regardless of the current capital gains tax rate.)

For the second and third options listed above, you make your choice and the resulting tax calculations on Form 4972 (Tax on Lump-Sum Distributions from Qualified Retirement Plans).

This is a key point: Your AGI does not include amounts for which you pay the 20% capital gains tax or amounts for which you use 10-year averaging. So AGI-sensitive tax breaks are not adversely affected by the income from the lump-sum distribution, if you choose either of these methods.

Reference: Practice Enhancers, Able & Co.