More than half of the people who filed their taxes got refunds this year, a little more than usual, but the amount of those refunds has surged over the last ten years. Many Americans have overpaid on their taxes throughout the year to get a larger refund at tax time.

Last year’s refunds averaged over $3,000, and this year’s average is not far behind, according to the Internal Revenue Service. This is nearly twice as much as the $1,700 average from 1999.

Current tax data from the IRS shows the growth in refunds hasn’t been limited to any one income level. People who suffered job or investment losses during the recession overpaid inadvertently, giving them bigger refunds.  The past decade also brought short-lived tax benefits where many taxpayers may not have adjusted their withholdings. A few examples include: the American Opportunity Education Credit; the Home-Buyer Credits; and the Expanded Child Credit.

Tax professionals and other financial advisors often frown on large tax refunds because they add up to interest-free loans to the government, thereby reducing investment capital in the same amounts. Many advise that it’s better to have the money in hand every month and invest it, spend it or just let it earn interest.  To many Americans, thought, a $3,000 check looks a lot better than $3,000 coming out of their paychecks over the year.

If your refund seems too big or too small, fixing it usually means making changes to your W-4. It’s the form your employer uses to figure withholdings on your paycheck. Amending it involves three worksheets and two tables, which is sometimes overwhelming to the average person.

The W-4 can be a headache even for people familiar with the 1040. A withholding allowance isn’t the same thing as an exemption. It’s intimidating for even the most seasoned taxpayers. If you aren’t comfortable filling out your own W-4, don’t try. It’s better to hire a tax professional.

If you pay a professional to do your taxes, he or she will most likely give you free help with your W-4. Most accountants do offer it. H&R Block doesn’t charge to fill out your W-4, if you are using them to prepare your taxes. Turbotax has a W-4 feature as part of its software program. The IRS also offers a withholding calculator at the IRS website. Make sure you have your paycheck and your tax return when you have this done to avoid any complications or delays.

Daniel Stoica Accounting Professional

Tax Topic 413 – Rollovers from Retirement Plans

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it within 60 days to another eligible retirement plan.

This transaction is not taxable but it is reportable on your Federal Tax Return.

You can roll over most distributions from an eligible retirement plan except for:

1. The nontaxable part of a distribution, such as your after-tax contributions to a retirement plan (in certain situations after-tax contributions can be rolled over),
2. A distribution that is one of a series of payments based on your life expectancy, or the joint life expectancy of you and your beneficiary, or paid over a period of ten years or more,
3. A required minimum distribution,
4. A hardship distribution,
5. Dividends on employer securities, or
6. The cost of life insurance coverage.

Further exclusions exist for certain loans and corrective distributions.

Any taxable amount of a distribution that is not rolled over must be included in income in the year of the distribution.

If a distribution is paid to you, you have 60 days from the date you receive it to roll it over to another eligible retirement plan.
Any taxable distribution paid from an employer-sponsored retirement plan to you is subject to a mandatory withholding of 20%, even if you intend to roll it over later.
If you do roll it over, and want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld.
You can choose to have your employer transfer a distribution directly to another eligible retirement plan or to an IRA.
Under this option, the 20% mandatory withholding does not apply.

In general if you are under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions unless an exception applies.
For a list of exceptions refer to Tax Topic 558.
Certain distributions from a SIMPLE IRA will be subject to a 25% additional tax.

Tax Topic 412 – Lump–Sum Distributions

If you receive a lump-sum distribution from a qualified retirement plan or a qualified retirement annuity and you were born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. These optional methods can be elected only once after 1986 for any eligible plan participant.

A lump-sum distribution is the distribution or payment, within a single tax year, of a plan participant’s entire balance from all of the employer’s qualified pension, profit-sharing, or stock bonus plans. All the participant’s accounts under the employer’s qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.

If the lump-sum distribution qualifies, you can elect to treat the portion of the payment attributable to your active participation in the plan using one of five options:

1. Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part of the distribution from participation after 1973 as ordinary income.
2. Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify).
3. Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify).
4. Roll over all or part of the distribution. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income.
5. Report the entire taxable part as ordinary income.

You should receive a Form 1099-R (PDF) from the payer of the lump-sum distribution showing your taxable distribution and the amount eligible for capital gain treatment. If you do not receive Form 1099-R by January 31st you should contact the payer of your lump-sum distribution.

You may defer tax on all or part of a lump-sum distribution by requesting that your employer directly roll over the taxable portion into an Individual Retirement Arrangement (IRA) or to an eligible retirement plan. You can also defer tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after receipt of the distribution. A rollover, however, eliminates the possibility of any future special tax treatment of the distribution. Refer to Topic 413 for more information on rollovers. Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump-sum from employer retirement plans regardless of whether you plan to roll over the taxable amount within 60 days.