Form 5329 exception – withdrawal from SEP to pay health insu
I am the wife of a sole-proprietor. I am taking a distribution from my IRA in 2011 in the amount of the health insurance premiums we paid in 2011. In 2010 and prior years, I received a W-2 from my husband’s business (although paid a very minimal amount in 2010). I did not work for him or anyone else in 2011. I did not collect unemployment compensation, nor could I, since the wages he pays to me are Federal and State unemployment exempt, as the wife of the sole-proprietor. I have worked for him and no one else for years.
Do you think I would qualify for this exception?
IRC Section 72(t), which states that a sole proprietor will be treated as meeting the requirements, if the individual would have received unemployment but for the fact the individual was self-employed. I would like to know if this applies to the wife of a sole-proprietor too, since I am not able to collect unemployment, since we didn’t pay unemployment taxes on my wages. . I think this is what congress intended, but I don’t know if there are cases/rulings relating to this. I previously worked for my husband for years and haven’t been employed elsewhere since 1995.
We have deducted health insurance premiums paid as a “self-employed health insurance deduction” on our tax returns in prior years. The health insurance is in my name and covers my spouse and children too.
Permalink Submitted by Alan Spross on Thu, 2012-01-12 19:24
Since you were paid on a W-2, you were considered as an employee, not as self employed. Not having collected UC as an employee would appear to eliminate this exception.
Perhaps you qualify for the other broader medical expenses exception which includes the cost of insurance, however is limited to the excess of 7.5% of joint AGI on Form 1040. There is no UC consideration for that exception. HOWEVER, you could have to apply this exception to a 2012 IRA distribution and 2012 paid medical expenses. You could not apply it to 2011 at this point unless the distribution was also taken in 2011. I think you meant to say that your distribution would be in 2012.
Permalink Submitted by Lisa Bray on Sun, 2012-01-22 23:14
IRC Section 72(t) states that a sole proprietor will be treated as meeting the exception requirements, if the individual would have received unemployment but for the fact the individual was self-employed. I know I was paid as an employee, but since I also was not able to collect unemployment due to being the sole proprietor’s wife, I can’t believe Congress intended for the exception not to apply to me as well. How can I collect unemployment if we didn’t pay unemployment taxes on my wages? Seems to me to be the same principle as the sole proprietor exception.
I was hoping someone has seen cases or regulations where someone was in a similar predicament.
Regarding the medical expense exception instead, the distribution was in 2011, but I don’t think we will qualify for a medical deduction, especially since the SEP distribution increases our AGI.
Thanks for your response.