IRA Withdrawals for Education; Stock Valuation for Estates; U.S. and California Residency

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, January 23, 2000.

Copyright 2000  Robert L. Sommers, all rights reserved.

Question: May I withdraw funds from my 401(k) or IRA to pay for education expenses without incurring the 10% early-withdrawal penalty?

Answer: You cannot withdraw money for education from a 401(k) without incurring an early withdrawal penalty. You are permitted to withdraw 401(k) funds prior to age 59 without penalty for "hardship" purposes only. Educational expenses are not considered a hardship.

The 10% tax on early withdrawal does not apply to IRA distributions for qualified higher education expenses ("expenses") of the taxpayer, the taxpayer’s spouse, or any child or grandchild of the taxpayer or spouse. Expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at a post-secondary school (including graduate courses). These expenses are reduced by the amounts of qualified scholarship, educational assistance allowance, or similar tax-free payments to the student. However, gifts and inheritances do not reduce the amount of expenses.

For example, if a student’s expenses are $10,000 and she receives a $5,000 scholarship and a $3,000 gift, the amount that can be withdrawn from the IRA without incurring the 10% tax is $5,000 ($10,000 - $5,000 scholarship = $5,000; remember, the gift does not reduce the expense amount).

Note: you cannot roll-over a 401(k) hardship withdrawal to an IRA and then withdraw the funds for education.


Question: If a stock holder dies during the night, how is the stock price determined for estate tax purposes?

Answer: If the stock was publicly traded, then the value is the average of the high and low selling prices on the valuation date (usually date of death). If the decedent died on a Saturday, Sunday or holiday, then use the average high and low selling prices on the first business day before and after the death. For example, if the taxpayer died on a Saturday, average the Friday high and low, then the Monday high and low, then average the two numbers. If Friday’s high was $15 and the low was $10, the average is $12.50. If Monday’s high was $25 and the low was $15, the average is $20. The stock price is the average of $12.50 and $20.00 which equals $16.25.


Question: My wife must reside in California for at least two years to receive medical treatment. As a foreigner with substantial annual income, if I accompany her will I be subject to U.S. income taxes?

Answer: Yes. If you live in California, you’ll owe both federal and California income taxes on your world-wide income. There is no exception for foreigners who have a pre-existing medical condition and who come to the U.S. for medical treatment, or their immediate family members who accompany them.

In general, if the taxpayer stays in the U.S. less than 31 days in the present year or 121 days per year for the current year and in each of the previous 2 years, he will not be considered a resident by virtue of his physical presence under the substantial presence test. Even if a foreigner meets this test, if he is in the U.S. less than 183 days in the current year and has a closer connection to another country, he will not be considered a resident for U.S. tax purposes. The lesson: To avoid paying taxes, do not stay in the U.S. more than 121 days per year.

California does not have a bright-line test for residency. Rather, California defines a resident as anyone in the state for other than a transitory or temporary purpose. California presumes a resident spends more than 9 months a year in the state; however, spending less time does not create a presumption of non-residency. However, if your permanent home is outside California, you visit the state for less than 6 months per year and do not work or engage in business during your stay, your presence is considered temporary or transitory and California will not tax you as a resident.




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