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Chris Phelps
Chris Phelps, CPA, CFP, PFS
Category: Legal
Satisfied Customers: 2710
Experience:  I have been a practicing CPA for over 19 years
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taxes

Customer Question

I was out of work all of last year except for 6 weeks when I finally landed a job. Since my medical insurance and expenses were so high I took a distribution ($10,000) from my IRA. I know there are tax penalties with doing so but I read that if the distribution was for medical expenses you may not be taxed the extra 10%. I received a 1099-R amd it has a distribution code of 1, but I did need it for an exception. What should I do?
Submitted: 11 years ago.
Category: Legal
Expert:  Chris Phelps replied 11 years ago.
You actually may be eligible for two exceptions to the 10% penalty.

The first you should consider using is the exception related to payment of health insurance premiums. Any IRA withdrawals received and used to pay health insurance premiums after you have received at least 12 weeks of unemployment (but before you were re-employed) will not be subject to the penalty.

The second exception allows you to avaoid the 10% penalty on distributions used to pay deductible medical expenses. The key word is deductible. Only the medical expenses that exceed 7.5% of your adjusted gross income are eligible to offset your IRA distributions for purposes of calculating the 10% penalty.

You need to get Form 5329 (Additional Taxes on Qualified Plans...) and indicate the exception you are using on line 2, Part 1. Use a separate Form 5329 for each exception you claim.

Let me know if there is anything else.    
Expert:  Chris Phelps replied 11 years ago.
I also assume you are not disabled, have not bought a home, have not paid for higher education expenses and have not made any non-deductible contributions to the IRA previously.
Customer: replied 11 years ago.
I also paid tuition for my daughter at college. Do I need to fill out form 8606 too? (I'm 47 by the way). I'm don't know what they mean by basis.
Customer: replied 11 years ago.
I also inherited another IRA for 15,000 that helped with tuition.
Expert:  Chris Phelps replied 11 years ago.
The 10% early distribution penalty does not apply to the portion of your IRA distribution that is equivalent to the amount you spent on tuition, books, fees and equipment for your daughter to attend school :). Just select code 8 on the 5329 with respect to those expenditures.

With respect to the inherited IRA there is no penalty due to the fact that the distribution was due to the original owners death (I'm sorry). Select code 4 on the 5329 for those distributions. Remember, prepare a separate 5329 for each exclusion from the 10% penalty.

The last 5329 you prepare will be for any IRA distribution not covered by an exception. Remember. the Inherited IRA is not subject to the penalty, just the income tax.
Chris Phelps, CPA, CFP, PFS
Category: Legal
Satisfied Customers: 2710
Experience: I have been a practicing CPA for over 19 years
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