Any help on the following issue would be great. I was injured on the job and was given a few choices on what to do with my 401k. After gathering some information, I decided to cash out my plan and take the 20% penalty to pay off bills I had accrued from my injury. I was told that due to my injury and being disabled I would not have to claim the income on my federal tax return for the year 2000. I had a few other plans that I cached out as well, that I did have to pay on. I just received a letter from the IRS saying that I am required to claim the income on my 2000 return. I am getting a mixed review of information from the IRS and other resources. I really need some help in determining whether or not I will have to pay the back taxes owed. Please help. Sign Confused Gimp. :confused:

Much confusion.
First, you should probably get IRS publications 590 and 575. www.irs.gov or 1-800-TAXFORM.

Next, you refer to 20%. This is probably the amount of federal withholding. It is only an approximation of the tax, not the tax itself. For any [pension, profit-sharing, 401(k), etc.] plan, whatever amount is distributed to you will generally be subject to federal taxation in the year it is paid, unless rolled over to an IRA. State tax as well. It is unlikely that a disability status will change that.

Get thee to a tax advisor, preferably one who has some familiarity with pension plans.

pax is right on the money. Russ, somebody was confusing the additional 10% excise tax with regular income tax. There is a 10% excise tax, payble on top of regular income tax, if you are under age 59 and 1/2. However, that 10% excise tax isn't paid in certain circumstances if you are disabled. But the regular income tax is payable. Find that tax advisor!

Thanks for all your help!