Question

Cara, who is 42 years old, had some unexpected medical expenses during the year. To pay for these expenses (which were above the 10% of AGI threshold and claimed as itemized deductions on her tax return), she received a $10,000 distribution from her traditional IRA (she has only made deductible contributions to the IRA). Assuming her marginal ordinary income tax rate is 22%, what amount of taxes and/or early distribution penalties will Cara be required to pay on this distribution

Answer 1

Cara will owe $2,200 in income tax on the $10,000 IRA distribution used for medical expenses but no early distribution penalty, given it was for qualified expenses exceeding 10% of her AGI.

Step-by-step explanation:

The question relates to the taxation of an early distribution from a Traditional IRA for medical expenses. Considering the 22% marginal tax rate, and factoring in early withdrawal penalties, we can calculate the total taxes and penalties on Cara's $10,000 distribution.

Calculating Taxes Due

Since Cara is under 59½, she typically would be subject to a 10% early distribution penalty, in addition to her ordinary income tax rate.

The ordinary income tax due is calculated as: $10,000 x 22% = $2,200.

Calculating the Early Distribution Penalty

The early distribution penalty is calculated as 10% of the distributed amount, which is: $10,000 x 10% = $1,000.

However, Cara took this distribution because of medical expenses above the 10% of AGI threshold, which she claimed as itemized deductions. According to tax law, distributions for unreimbursed medical expenses that exceed 10% of adjusted gross income are exempt from the early distribution penalty.

Therefore, Cara will owe $2,200 in income tax on this distribution, but no early distribution penalty, assuming all $10,000 was used for deductible medical expenses.

Answer 2

Answer: $2,200 income tax; $1,000 early distribution penalty

Step-by-step explanation:

The IRS allows for withdrawals from the IRA before retirement without penalty if the withdrawal is for unreimbursed medical expenses that do not exceed 10% of the person's AGI.

As the expenses exceeded the 10% AGI threshold , She will owe a penalty of 10% on the withdrawal;

= 10,000 * 10%

= $1,000

She will also have to pay her income tax on this.

= 10,000 * 22%

= $2,200