Partial penalty exclusion for medical expenses denied
I had an IRS agent deny a 10% IRA early withdrawal penalty exclusion for medical expenses because the distribution exceeded deductible medical expenses. Approximately $33,000 was distributed from taxpayer’s IRA, fully taxable, Code “1.” That same year taxpayer had approximately $11,000 in deductible medical expenses after applying 7.5% AGI threshold. $11,000 was excluded from 10% penalty calculation. IRS rejected partial exclusion saying the entire distribution had to qualify for exclusion or there’s no exclusion. I’ve never heard that and haven’t been able to find any authority to support (or refute) IRS’s claim.
Permalink Submitted by Alan Spross on Fri, 2009-07-24 20:13
This should be referred to higher authority at the IRS who is capable of correctly interpreting the following provision in Sec 72(t):
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(B) Medical expenses
Distributions made to the employee (other than distributions described in subparagraph (A), (C), or (D)) to the extent such distributions do not exceed the amount allowable as a deduction under section 213 to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the employee itemizes deductions for such taxable year).
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This seems fairly straightforward, with no possibility of an “all or none” requirement. Perhaps they don’t realize that Sec 213 includes the 7.5% limitation.