1)I became disabled with a rare disease in 2005, and have been on SSDI and Met Life Disability (substantial and non-taxable, fantastic).
2)My disease caused me to have extensive jaw damage and loose all my teeth this year, the surgeries are extensive and were ruled dental and not medical even though it was clearly caused by my disease. The cost of the surgery this year came to 64K which I took from an old 401K, tagged it disabled to avoid the 10% penalty and took 10% withholding (ok, a little short).
3)The distribution, when added to out income threw us just over the line, and we lost ALL of our deductions including the medical and our church tithe which are substantial, hence we are now in the 34% bracket instead of the expected bracket.
4)My husband started a small ebay business that if you look at it seriously it ran at a loss, it actually has a dedicated 600+ sq ft, and 1000's of items in inventory, dedicated office, computers etc, DBA, Sole Proprietorship, but no separate accounts, nonreal book-keeping but there is a Sams Business Card, and a PayPal Account, from the end of Oct, about 40 items were sold for around $3000, no $1099-K was issued.
5)If we take enough loss (if there is once I try and but the books together) from the business to offset the 401K distribution, is this huge audit flag, the inventory is nightmare as each item is unique, to put into quickbooks if I can figure out how (ebay is a nightmare)
6)my 6500 401K deposit is also non-deductible!
Sure would appreciate any help you can offer.