I have an inherited IRA.?

with $40k in it. I have dual citizenship and I do not reside in the country (USofA) that the IRA is in, so I have no taxable income of which to speak in the USofA. I will be needing some funds for my business and I do not want to go to the bank because my budget is as clipped and stretched as it can get. I was wondering what my tax burden would be if I withdrew half or maybe all of it.
I am a married father with 2 kids and, as stated earlier, have no taxable annual income in the USofA of which to speak.

I am a natural born US citizen and my parents were also.
I am residing in Israel right now.
I am concerned about my US taxes and what the tax burden would be on the IRA, I have heard that you get taxed on the whole amount of the IRA if you withdraw more than the allotted anual dibursement (sp?).
I have also heard that you are only taxed on the amount you withdraw.
But which tax is it, an income tax... if I take out $20k and that is my annual income for a family of four for the year I would assume I would not be taxed too much, but How much...

Based on the new information:
"I am a natural born US citizen ... I file a return every year."
I am assuming this is a US return and you are using the Foreign Earned Income exclusion to exclude your wages.

"I have heard that you get taxed on the whole amount of the IRA if you withdraw more than the allotted annual disbursement."

Not quite true. From IRS publication 590:
"you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries."

Publication 590 has the rules for how quickly you *must* start taking the distributions (and get taxed). You can always take more money, but not less.

"if I take out $20k...I would assume I would not be taxed too much..."

Depends on your definition. How much foreign earned income are you excluding NOW? The IRS taxes the additional income as if you couldn't exclude the foreign income (the worksheet for calculating the tax is in the 1040 book). If you would otherwise be in the 25% tax bracket, then it's taxed at 25% up until it kicked you into a higher tax bracket. If you were already in the 33% tax bracket, etc.

Whatever you withdraw will count as US income. The IRA will deduct a certain amount for taxes, most likely 20%. You can file a tax return to determine if some of it should be refunded. The IRA was invested with before tax dollars, and the government will want its share of the tax when you withdraw it.

Under normal circumstances, assuming that this is a Traditional IRA, the distribution is taxed as ordinary income. If the distribution is made prior to the recipient reaching the age of 591/2 there is a 10% early withdrawal penalty.
Now your circumstances seem to raise more questions than answers. To answer that part of the question one would need to know a great deal more about the circumstances under which you inherited the IRA and how it has been held. You seem to suggest that you do not normally file a US tax return. That in it's self is a bucket of worms. You stated that you have "dual citizenship". I am guessing that one of the countries that you believe you have citizenship would be the US. Therefore all of your worldwide income is subject to US taxes, which would have a major impact on the taxation of the IRA distribution. It may also raise the question of what you have been doing about prior year US tax returns.
The conclusion I would come to after considering all of these possibilities is that you should consult with a tax professional and review all of these factors before you do anything.

The estate might have been taxed on it. If not, you will have to pay income tax on the distribution, but no penalties because you are under age.

When did your mother die? If it was before 2007, then this money can no longer be in an IRA. In this case, I would need more information about how this money is now invested to answer your question.

If your mother died in 2007, then it was possible that the IRA was rolled over into your IRA.

Assume first that the account is now your own IRA. Since you are a US citizen, you are not subject to the 30% withholding rule for nonresident aliens. Your financial institution is required to withhold 10% unless you request that no withholding be taken out.

As for your income taxes, any distribution you take will be added to your other income (world-wide). You will pay US taxes based on the total of your world-wide income plus the IRA distribution. In addition, you will pay a 10% penalty on the amount of the distribution.

So if you took out $20,000, you would pay $2,000 plus your other income would increase by $20,000 and you would pay tax on the total.

Second, assume your mother recently died and you have not rolled this into your own IRA, and you are the beneficiary. Then you can take a distribution directly from her IRA. In this case, you will not pay a 10% penalty since it is a distribution from a deceased taxpayer. You would still pay income tax on the distribution, and 10% withholding would apply unless you waive it.

If this situation applies, then you can distribute the entire IRA and pay tax on all of it, or take a distribution of part of it and roll the rest into your own IRA. Keep in mind that once you roll it into your own IRA, subsequent distributions before age 59.5 are going to be subject to the 10% penalty.

1. Any U.S. citizen, including a dual citizen, must pay U.S. income tax on all income, worldwide, not just U.S. income. You may be able to avoid or reduce the tax on income earned outside the U.S. by claiming a credit for tax paid to the country in which you earned the income. However, you must still file a U.S. tax return and report this income on your U.S. tax return.
2. Only the amount distributed (withdrawn) from the IRA is taxed. The part remaining in the IRA is not taxed while it remains in the IRA.
3. In addition to the ordinary income tax, at the rate based on your total income, there is also a 10% penalty.

First, there is no penalty on inherited IRAs. Second, unless inherited from a spouse, this IRA is never considered yours....it is specifically an inherited IRA and has its own rules for required minimum distributions. Finally, only the amount of distribution is taxable. See IRS pub 590 link below.

How much tax will be due depends on your other taxable income. You are married so you'll have a std seduction of $10400 and 4 exemptions of $3400, meaning that the first
$24000 will not be taxed, so if your other taxable in come is $4k or less, tax will be zero. Also, if your dependent kids are under 17 you will have $1000 tax credit for each to further reduce your tax.