Tax Prophet: FAQ November 17, 1996

Frequently Asked Tax Questions - November 17, 1996

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, Sunday November 17, 1996

Early withdrawals from an IRA account; Foreign student with capital gains


Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.

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  1. Question: My spouse, age 50, is terminally ill and needs to draw from her IRA. Will the IRS waive any taxes or penalties on this money?


  2. Question: As a foreign citizen studying in the United States under a student F1 visa, do I owe U.S. income tax on sales of my U.S. stock, or on interest from U.S. or foreign bank accounts?


  1. Answer to Question #1:

    Penalties will be waived, but not taxes. Withdrawals from retirement accounts, such as an IRA, are always taxed at ordinary income tax rates. She may withdraw distributions from her IRA prior to age 59 without a 10% premature distribution penalty, because she is disabled. Disability is defined as long-term or terminal mental or physical impairment that prevents a person from engaging in a "substantial gainful activity" (earning a decent living).

    Otherwise, generally, premature distributions will be penalized, unless they pay medical expenses in excess of 7.5% of her adjusted gross income. Also, under certain conditions, the 10% penalty tax will not apply to IRA distributions to pay health insurance premiums to an individual after separation from employment.

    Finally, an owner can elect to receive IRA distributions prior to age 59 without penalty, provided, in general, these comprise a series of substantially equal periodic amounts, made at least annually, for the life expectancy of the owner.

    President Clinton campaigned for changes in IRA distribution rules to allow penalty-free withdrawals for major life expenses, such as education and training, first-time home purchases and financially devastating medical expenses (including nursing care for one's parents). Whether these changes become law depends on Congress.


  2. Answer to Question #2:

    If you comply with certain requirements, you will not be taxed on your U.S. stock sales or interest earned from a U.S. bank (or savings and loan) account. Generally, presence in the U.S. for 122 days or longer per calendar year creates a presumption of residency. However, the days in which a foreign citizen is present in the U.S. as a foreign student (under an F1 visa) may be excluded from the determination of residency.

    You may utilize this student visa exception for five calendar years if you: substantially comply with your visa requirements; and file an annual disclosure statement explaining that you are entitled to exclude these days in the U.S.

    Presence for even one day during a calendar year will count that entire year toward the five-year maximum. Thereafter, you will become a U.S. resident, unless you can demonstrate that you will not permanently reside here. This is accomplished by maintaining a closer connection to another country than the U.S. and by not taking steps towards permanent residency ("green card") status.

    A student who is considered a non-resident alien (neither a U.S. citizen nor a resident) is not taxed on interest income from U.S. bank accounts or on gains from securities sales. Non-bank interest, rental income, dividends, wages and salary, however, are subject to a flat 30% tax, unless there is an applicable treaty rate which applies. Any foreign citizen may elect to pay taxes on income from real estate as if he were a U.S. resident.

    Sales of real estate located in the U.S. are always subject to income taxes (usually at capital gains rates) whether or not the owner is foreign. Income and gains derived from a foreign country by a non-resident alien are usually not subject to U.S. taxes.



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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**