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IRA withdrawal and farm income loss

If I withdraw from my IRA to pay business expenses on my farm, can I claim that expense as a loss on my tax return?

Hello... I have an IRA that is in a money market in a local bank. It is the result of an stock bonus plan from a company that i used to work for. I exercised the option to convert that from stock to an IRA last year. Last year i also went through a divorce. I was able to keep my portion of the IRA. I am in the farming business...my only income right now...this year i have to give my x half of the crop income and have to pay all expenses for this crop year so my schedule F for farming will show a loss....if i were to take out part or all of the IRA to pay down expenses and debt...would that / could that be used to offset loss from schedule F....if i am able to scrape by by not doing that..is there any thing else i should look at being this a loss year for income....(read a blurb about converting a IRA to a Roth IRA)(maybe you can point me to a resorce to read up on that).... Thanks I read a bunch of your replies to other readers but didn't see any that matched my particular issue

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Bill's Answer
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Highlights

  • Check with a CPA or accountant, whenever complex tax issues arise
  • Consult with your divorce attorney regarding your ability to issue a 1099 to your ex-spouse
  • Consider all the tax implications, when withdrawing money from an IRA

Thank you for your detailed question about withdrawals from your IRA, business losses from your farm, your divorce, and the resulting tax implications.

Your situation is so complex that the best recommendation I can offer you is to speak with a CPA or tax specialist who is experienced in preparing returns for a farmer. Not every tax preparer is familiar with Schedule F expenses and how to properly prepare the form. There are special rules that can apply to your farm income and you want to make certain that you take advantage of these rules and leave yourself with the lowest possible legal tax obligation.

One thought that occurred to me is that maybe you can issue a 1099 to your ex-wife, thereby lowering your taxable income. Please check with your divorce attorney to see if this is permissible.

Regarding your IRA, unless it is a Roth IRA, you cannot withdraw money without penalty if you are younger than 59 1/2. There are certain hardship exceptions to the age 59½ requirement, but none of them seem to apply to your case. According to the IRS, hardships include withdrawals to: "(1) to purchase a principal residence; (2) to prevent eviction from, or foreclosure on, the principal residence; (3) to pay certain medical expenses incurred by the participant, participant's spouse, or dependents; and (4) to pay certain educational expenses incurred by the participant, participant's spouse, or dependents."

Regardless of whether or not you will be penalized for withdrawing from your IRA, you will be fully taxed on the amount withdrawn, unless it is a Roth IRA.

In general, you want to avoid, whenever possible, withdrawing from a retirement account. One reason is that you need the money when you retire. The other is that if the withdrawal is taxed not only do you have to pay taxes on the withdrawal, but the amount withdrawn can boost you into a higher tax bracket. If this happens, the monies you budgeted to cover your tax obligation on your other sources of income may turn out to be insufficient.

To reiterate, my recommendation is that you speak with a CPA or tax specialist regarding the farm loss and the tax exposure for any IRA withdrawals and speak with your divorce attorney to see if the divorce decree permits you to issue a 1099 to your ex-wife for the amount you are paying her from the farm income. If your attorney says you can issue a 1099, make sure to review how to go about doing so with your accountant or tax-preparer.

Owing the IRS is a less than pleasant happenstance. Sometimes, when an error is made on a tax return, the IRS does not catch and correct the mistake for a few years. If this happens, the IRS charges the taxpayer penalties and interest dating back to the original due date of the return. This can turn a moderate tax problem into a very large one. The cost of having a professional prepare your return, whenever complex issues are involved, is well worth the expense.

I hope this information helps you Find. Learn & Save.

Best,

Bill

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