You become permanently and totally disabled.
As an alternative, you may want to consult a personal financial planner (or your plan may have someone) who can offer you guidance on how the underlying assets within the 401(k) are invested.
-- Sharon Lechter, CEO, Pay Your Family First, Paradise Valley, Ariz.
Q: Two years ago I retired and used my 401(k) money to start a business. After the bottom fell out of the economy, the business failed and now I owe taxes I can't pay. I've seen ads for a company that claims it can reduce your tax bill. Is that legitimate? What other options do I have?
A: For any offer to reduce your taxes or make a debt to the IRS go away, bear in mind that anything that sounds too good to be true likely is. If you have a paid return preparer, see how they can help you use the programs offered by the IRS to help people pay their debts.
The IRS recently expanded its "Fresh Start" program to help people who can't afford to pay their taxes. Go to irs.gov and search under "Fresh Start" for information on installment agreements, offers in compromise and penalty relief. If you owe money for your state taxes, be sure to also check your state's website for information.
-- Annette Nellen, professor, Department of Accounting & Finance, College of Business, San Jose State University
Q: I was on unemployment for part of 2011. I read that the economic stimulus bill exempted unemployment benefits from taxes. Is that still the case?
A: In 2009, the American Recovery and Reinvestment Act excluded the first $2,400 of unemployment compensation from taxable income. This provision has expired and is not available for 2011.
-- Daniel T. Moore, D.T. Moore & Co., Salem, Ohio
Q: Our adult child lives separately from us but relies on us for tuition, room, board and health insurance. Can we claim him as a dependent on our tax return?
A: There are several tests to claim a dependent, one of which is the residency test. If you meet all the other tests, you may claim your child as a dependent if he/she lives with you for more than half the year. There is an exception for temporary absences due to education. You can claim your child as a dependent if the absence is temporary for education and you meet all the other tests. For further information about the other tests, check IRS publication 501.
-- Ernest Almonte, Almonte Group, Providence, R.I.
Q: My daughter was involved in a lawsuit and expects to receive a settlement. Will she owe taxes on the money?
A: This is definitely a situation that requires professional assistance from a tax adviser with experience in lawsuit settlements. There are different rules for various types of settlements. For example, personal injury settlements may be tax-free, while ownership disputes are generally taxable. The issue can be complex with parts of the same settlement having different tax treatments.
-- Janet C. Hagy, Hagy & Associates, Austin
Q: I invested in a company that went bankrupt last year. Can I deduct a loss for worthless stock?
A: If it can be shown that the stock is completely worthless, a capital loss can be claimed in the year that the stock became worthless. It must be shown that the stock has zero value. A bankruptcy process does not automatically mean that the stock is completely worthless, but it may provide information that supports the conclusion.
If a worthless stock loss can be claimed, it will usually be a capital loss, and may be limited in the amount deductible in the current year. You can use it to offset capital gains and up to $3,000 of other income. Any unused loss may be used in future years subject to a similar limitation.
-- John McWilliams, professor of accounting, Golden Gate University, San Francisco
Note: Answers are provided without having full knowledge of all the details of the taxpayer's circumstances and an opportunity to conduct in-depth research. The CPAs answering readers' questions cannot assume liability for tax advice provided in these answers, and before acting on any advice provided, taxpayers should consult a CPA or other competent professional. Also, the IRS requires the following notice: Any tax information in this Q&A is not intended to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
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