Excess State Disability Insurance Contributions Will Reduce Total Tax Liability

Q: I had two jobs last year. With multiple paycheck deductions, I know I have paid more of certain taxes than I am required to. I know how to make a claim for excess Social Security withholding, but what about state disability insurance? Are overpayments refundable?

--I.N.

A: Look for the line on your California Form 540 tax return labeled “excess California SDI withheld.� The number you fill in that blank is added to your other withheld taxes and either reduces the amount you owe the state or increases the refund the state owes you. Other taxpayers might be interested to know that they should go to line 58 of the federal 1040 tax return to list the excess Social Security taxes withheld from their paychecks. Again, your overpayment will either reduce the amount you owe or increase the size of your refund.

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Q: I inherited some Savings Bonds that cost my mother $10,000 and are now worth $45,000. No income taxes were ever paid on the accrued interest. Estate taxes were paid on the $40,000 value of the bonds at the time of her death. I cashed in the bonds last year. What part of the $35,000 gain is taxable, given that estate taxes were already paid when the bonds were worth $40,000?

--P.K.D.

A: If your mother never paid any income tax on the bonds’ accrued interest--including on her final, posthumous tax filing--you are liable for taxes on the full $35,000 gain.

But your tax bite is not as bad as it might seem. At the time you cash in the bonds and pay the taxes, you are entitled to a deduction for the estate taxes already paid on the bonds’ appreciation. For example, if the estate taxes on the $30,000 interest ($40,000 value at mother’s death minus her $10,000 cost) amounted to $100, you would deduct that amount from your income tax bill for the $35,000 appreciation.

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Q: I know that after turning 70 1/2 I must start making withdrawals from my tax-deferred retirement accounts. I have both a 401(k) account and an IRA. May I make a single withdrawal from one type of account to satisfy my entire disbursement requirement?

--F.S.

A: You may not aggregate your total required retirement savings disbursements and make a single withdrawal from a single tax-deferred account.

However, you may make your total required 401(k) withdrawal from a single 401(k) account and your total required IRA withdrawal from just one IRA account. But you may not satisfy your one retirement plan disbursement requirement with a withdrawal from another type of plan.

If all these accounts are too confusing for you, you are allowed to roll your 401(k) plan into your IRA. But be advised that taxpayers who elect to cash out their 401(k) or other qualified pension plans must pay a 20% withholding tax on the disbursement if they take possession of the money rather than have it rolled over directly to a qualified individual retirement account.

Even if the taxpayer puts the pension money in an IRA himself or herself within the allowed 60 days, the 20% tax is applied. You must make a trustee-to-trustee transfer to avoid the tax bite.

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Q: I expect to get a large disbursement from a profit-sharing plan I had with a previous employer. I plan to roll this money into an individual retirement account. However, my husband and I want to start a small business and are wondering if there is any way we can use this money as collateral for a business loan. Maybe there is some other way we could tap into it without having to pay taxes?

--O.D.H.

A: We know of no legal way for you to use your IRA to help start your business without subjecting yourself to both taxation and a 10% penalty for premature distribution. Even using your account as collateral for a loan qualifies as taking a taxable distribution.

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Q: I was injured in an automobile accident and accumulated bills totaling $22,000. I recovered $25,000 from the other driver, the limit of his insurance. He had no other assets we could attach. Of my recovery, my attorney got $5,000 and the rest went to pay my medical bills. Am I required to consider the insurance recovery as income and pay state and federal taxes on it? Can I claim my medical expenses as a deduction? Also, is the state disability insurance I received taxable?

--K.S.

A: A recovery for personal injury is not taxable. Even if your recovery is in excess of your medical and legal bills, you will not be taxed on the money you were able to keep, say our tax experts. So you do not have to report the $25,000 insurance payment you received. And there’s more good news: State disability insurance payments are not considered taxable income by either the federal or state government.

Medical expenses, however, are not deductible to the extent that you were reimbursed. Based on the figures you provided, it looks as though you had $2,000 worth of medical bills for which you were not reimbursed. Medical expenses are deductible only to the extent that they exceed 7.5% of your adjusted gross income.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles,

CA 90053, or e-mail [email protected]