ExpertHard1 markMultiple Choice
CPA · Question 65 · Area IV: Individual Taxation
Taxpayer M, age 50, withdrew $10,000 from a traditional IRA in the current year to pay for unreimbursed medical expenses that exceeded 7.5% of AGI. M has not met any other exception. What is the tax treatment?
Taxpayer M, age 50, withdrew $10,000 from a traditional IRA in the current year to pay for unreimbursed medical expenses that exceeded 7.5% of AGI. M has not met any other exception. What is the tax treatment?
Answer options:
A.
Subject to income tax and 10% penalty.
B.
Subject to income tax but exempt from 10% penalty.
C.
Exempt from income tax and 10% penalty.
D.
Subject to 10% penalty but exempt from income tax.
How to approach this question
Recall IRA Penalty Exceptions (HIM DEAD: Home, Insurance, Medical, Disability, Education, Adoption, Death). Medical is an exception.
Full Answer
B.Subject to income tax but exempt from 10% penalty.✓ Correct
B
Withdrawals from a traditional IRA are subject to ordinary income tax. Generally, a 10% penalty applies if under age 59.5. However, an exception exists for medical expenses in excess of the AGI floor (7.5%). Therefore, M pays tax but no penalty.
Common mistakes
Thinking the exception makes the withdrawal tax-free (it only waives the penalty).
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