WASHINGTON (5/8/08)--The Internal Revenue Service (IRS) released guidance for taxpayers and financial institutions about withdrawals of 2008 tax rebates that are directly deposited into individual retirement accounts (IRAs), Coverdell education savings accounts (ESAs), and health savings accounts (HSAs). Taxpayers who told the IRS on their 2007 income tax return to deposit all tax refunds into a tax-advantaged account--such as an IRA, Coverdell ESA, or HSA--have discovered that the IRS also deposits their tax rebate to the same account. Announcement 2008-44 permits taxpayers in this situation to withdraw from the IRA, Coverdell ESA, or HSA an amount less than or equal to the Economic Stimulus payment tax- and penalty-free. A withdrawal of the tax rebate from an IRA or HSA must be made by the filing deadline for the 2008 federal income tax return, plus extensions. The withdrawal deadline for a Coverdell ESA is May 31, 2009 or the designated beneficiary’s extended filing deadline, whichever is later. Unlike other withdrawals of contributions prior to the filing deadline, the income attributable is not computed or withdrawn under this rule, according to Dennis Zuehlke, compliance manager for CUNA Mutual Group, which serves 80% of credit unions offering IRA programs. Credit unions receiving direct deposits of tax rebates and their subsequent withdrawals should report the contribution and withdrawal in the usual manner:
* The deposit will be reported as a regular contribution on Form 5498; and * The withdrawal will be reported as a regular withdrawal (distribution code 1, 3 or 7) on Form 1099-R.
Taxpayers will be required to follow the instructions in their Form 1040 package to report the withdrawal and avoid taxes and penalties on the amount withdrawn. By not requiring a separate reporting scheme, credit unions will not have to incur additional expenses to adapt their data processing systems to report these one-time distributions, and members will be able to withdraw their tax rebates with relative ease, said Zuehlke.