1099-R Exceptions to penalties

[miatax]

I have a friend / client whom I just finished prepping his 1040. He went through a bad divorce in 2009 and had to pull funds from his retirement account to satisfy the divorce settlement (which increased his AGI)in addition to $3,000 in canceled debt and $1,500 from a 1099Q.

He got 20% withheld from the distribution (with a dist code 1) but bottom line, he still owes $8,700 based on his numbers. The problem is for 2009 he had a few less Sch A items and the distribution caused his total AGI to go up.

He is making ends meet with all of his payments and to top it off now he has an $8,700 bill from Uncle Sam. Am I missing anything new in the law relating to taking money out (penalty free) from a retirement account to satisfy divorce settlements? There are no alimony payments for reduction of AGI. I am trying to see if there is anything else that may help and I would feel terrible if I missed something.

He doesn't qualify for making work pay credit either because of his out of the ordinary AGI.

:-(

[jainen]

>>his out of the ordinary AGI<<

Well, gee, I'm sorry about his love life but it sounds like he had a ton of money he could draw on from different places, so I guess he's doing okay. In terms of planning, we must note that he has no requirement to pay support. It was just a fair division of marital assets, and the tax code has various ways to transfer the tax burden to the recipient.

Unfortunately, it doesn't work so well with retroactive planning. But do we have any reason to think the settlement did not already account for the tax cost? Isn't he kind of trying to double-dip now?

[Lion EA]

It's a pretty short list of exceptions to the penalty. Go down the list and see if anything can help. Was he unemployed, had to pay his own health premiums, medical greater than 10%, etc. IRA or 401(k) or...? First-time home buyer or qualified education expenses or...? Why do they come to us after doing this. He could've split part of his account into his ex's name as part of the divorce settlement and let her withdraw or whatever. Or, set it up for substantially equal withdrawals. Or, borrowed money on a home equity loan or even maxed out his credit cards and have less of a tax hit. But, no, we stay up late researching and trying to clean up their messes! Installment agreement will lower his interest rate (do it on line to lower the set-up fee). Next year will be better. Put a positive spin on it for him.