Your Money: Sandy hardships may qualify you for 401(k) withdrawals

There is such a thing as real hardship - even the tax man recognizes that. So, if you were hurt by Hurricane Sandy, there may be a bright spot for you in 2013.

It's something called the "401(k) hardship distribution."

In response to Hurricane Sandy, the IRS liberalized what are known as "hardship withdrawal" rules for victims who had losses resulting from Sandy. Under the relief, 401(k) plans allow participants to take out money until February 2013.

The IRS has said 401(k) plans and similar employer-sponsored retirement plans allow you to take out loans or hardship distributions if you are a victim of Hurricane Sandy or members of victims' families.

What isn't well-known is that even a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent, or other dependent living or working in a Sandy-affected region.

To qualify, hardship withdrawals must be made by Feb. 1, 2013.

Employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans, may also be eligible to take advantage of streamlined loans and liberalized hardship distribution rules, according to FINRA, the Financial Industry Regulatory Authority (www.finra.org).

Generally, we're not allowed to take money out of a 401(k) plan while still employed and before reaching age 59½ years. If we do take money early, we pay a 10 percent penalty. There are, of course, exceptions such as death, divorce, or disability.

However, if your plan provides for hardship distributions, and you can show that you have an immediate need, you may be entitled to funds. New Jersey disaster areas are eligible, and President Obama declared emergencies in parts of Delaware and Pennsylvania.

You can deduct Sandy-related losses on taxes, such as an itemized deduction for personal losses from fires, storms, car accidents, and similar "sudden, unexpected, or unusual" events. The deduction is available only for physical damage or loss to your property, but there are limitations. The loss you take on your taxes must be reduced by these amounts:

First, to the extent that you are insured, you must reduce your loss by your insurance reimbursement.

Second, for each casualty, you must reduce your loss amount by $100. This reduction is per "event," not per item damaged. Thus, if a storm knocks over a tree that damages your car and home, you have three property losses (tree, car, and house) and only one reduction.

Third, after combining all of your losses under the above guidelines, you must reduce them by 10 percent of your adjusted gross income in the appropriate tax year. Only the loss amount above this "floor" may be deducted.

Where property serves both business and personal purposes, these limits apply only to the personal part of the loss.

Check out the following IRS resources: Publications 584 and 584B; Publication 547; and Form 4684 at www.irs.gov.

Regardless of whether Congress passes a deal to avert the so-called fiscal cliff, there is one tax going into effect no matter what: the 3.8 percent Obamacare tax kicks in Jan. 1, 2013.

The Health Care and Education Reconciliation Act of 2010, often referred to as Obamacare, imposes a new 3.8 percent surtax on most net investment income of individuals, estates, and trusts for individuals with more than $200,000 income, and married couples filing jointly with more than $250,000. The tax applies to a range of securities, from stocks and bonds to commodities and derivatives.

The IRS issued proposed regulations regarding this surtax, says Alan Mandeloff, a partner at Citrin Cooperman in Philadelphia. Here's a link to his firm's client updates regarding the 3.8 percent tax: http://ph.ly/newtax.