Final answer:
Rayna's $35,000 IRA distribution to pay for qualified education expenses of $30,000 (after accounting for a $5,000 scholarship) is not subject to the 10% additional tax. Therefore, the amount of the distribution subject to the 10% additional tax is $0.
Step-by-step explanation:
Regarding Rayna, age 51, who takes a $35,000 distribution from her traditional IRA to pay qualified education expenses for her friend's daughter, it is important to understand the tax implications associated with such a withdrawal. The IRS provides specific guidelines on distributions from traditional IRAs for education expenses. While the distribution generally would be included in taxable income, there is an exception to the 10% additional tax (early withdrawal penalty) for distributions used to pay for qualified higher education expenses.
As per IRS rules, qualified education expenses can include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Nevertheless, reductions must be made for tax-free assistance, such as scholarships or fellowships. Jade's education expenses total $35,000, but she also received a $5,000 nontaxable scholarship. The scholarship reduces the total qualified education expenses to $30,000 ($35,000 - $5,000).
Since Rayna is using the IRA distribution for Jade's reduced qualified education expenses of $30,000, only this amount would be exempt from the 10% additional tax. Therefore, the correct amount of Rayna's distribution subject to the 10% additional tax would be $0, as she is using it all for qualified education expenses post-accounting for the scholarship received by Jade. Hence, the correct option is $0.