CPA’s Answer Tax and Finance Questions!

We’re happy to respond online to questions of general interest, but please do not take information we publish as professional advice for your specific circumstances (see our website Terms of Use).

Because we’re responding in a public forum, our answers will focus on the most common cases.  

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401kI recently had to cash in a 401k to help defray some living expenses because of hardship. I lost my job. What should I be looking at concerning tax penalties?  I want to get a feel on approximately how much I should be looking to pay. Also, What can I do to reduce my tax burden because of my actions?

In general, early distributions taken from a 401k plan incur a 10% tax Federal penalty AND the amount distributed is added to a person’s taxable income for the year the distribution occurs. (Depending upon where you live, there may also be a STATE penalty for distribution and also state income tax. ) There are some exceptions to the penalty for immediate and heavy financial need.

The information about how the Internal Revenue Service classifies “heavy  financial need” and additional information is available on the IRS site at http://www.irs.gov/retirement/participant/article/0,,id=151787,00.html .

The rules are complex, and we recommend that individuals receive advice from a tax professional.

The steps you can take to reduce the tax liability from the distribution are the same ones which you should normally take to pay the least legal amount of taxes. There are no special procedures to follow.

Hi, I am a German citizen who moved to San Francisco about 1.5 years ago where I work. From a tax perspective I’m a U.S. resident this year for the first time. There’s one issue I’m having trouble with: I’m a part owner of a rental property in Germany and have around 10k income from that. How should I integrate that income into my U.S. tax declaration?

If a person is a resident of the California, the Federal and State governments want you to declare your income world-wide. This would include rental income from property in Germany. The Federal tax law provides a foreign tax credit to help make you whole for taxes paid to Germany. (See https://www.irs.gov/Individuals/International-Taxpayers/Foreign-Tax-Credit) However, there is no foreign tax credit available for California state taxes.

I’d like to know if there is any issue with the following scenario:

I own an S-Corp. LLC and we lease our production space in a town adjacent to my personal residence. Can my LLC pay for the installation of solar panels on the roof of my personal residence? The LLC would be allocated 100% of the benefit (future solar tax credits) so there would be a benefit to the business. Would the install of the solar panels be a legitimate business expense for the business?

The short answer is a LLC probably cannot absorb the expense of installing solar panels on the residence of its owner.  There may be details we don’t understand in the scenario you outlined, but the installation of solar panels at the residence of the LLC’s owner doesn’t appear to have a commercial rationale. The installation would have to have a business purpose for the LLC for it to qualify as a deductible expense.

 If I am a single-member owner of a Nevada LLC, living in Nevada, performing work as a software developer entirely for a California client, and performing that work entirely in my Nevada home, am I liable for California corporate and/or personal income taxes?

In general, if you do all of your work in Nevada and reside there, you would not owe California taxes. However, there are lots of things we do not know that could make Calfornia think you have a nexus in the state that would require you to pay income taxes. For example, if you or the LLC owned property in California, the state might try to convince you that you owe taxes.

The whole issue of nexus is complex, and aggressive state tax collectors make giving a simple YES/NO answer more difficult.

I have a quick question. I inherited around 150K from overseas and if transfer that money to my US bank account, do i need to pay tax? I’m not a citizen but have a greencard and a SSN…and my dad was not a US citizen, so there is no SSN or any registration IRS can look up. I do Have a SSN and greencard though

I live in TX – no state income tax

In general money you receive from a foreign person as a gift or bequest is excluded from your US income. It’s not taxed. HOWEVER, you may need to file a Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.

More information is available on the IRS website.