10% penalty exceptions
I have a client who took an early distribution from his IRA and therefore is subject to the 10% penalty. He is unemployed and qualifies for the exception when the distribution is used to pay for health insurance premiums. Since the distribution was far in excess of the premiums paid and he has other unreimbursed medical expenses can I use the amount claimed on schedule A for medical expenses(after taking in account the 7.5% limitation) as a additional exception? It appears that I am double dipping since the medical expenses claimed on schedule A also includes the health insurance premium
Permalink Submitted by Alan Spross on Mon, 2010-06-07 23:45
Your question is a good one. The client can use both exceptions, but cannot use the same expenses for both of the exceptions (aka double dipping).
Accordingly, the maximum dollar penalty exception should be calculated by first applying the medical insurance exception since there is no 7.5% AGI floor for this exception. Then he should deduct those costs from the total unreimbursed medical expenses subject to the 7.5% floor to determine if there are remaining unreimbured medical expenses to waive the penalty on additional amounts.
Both exceptions have multiple requirements that must be met, and client should note that these include the timing of expense payments and the IRA distributions. This can require considerable planning given the inconsistency of medical billing, insurance reimbursements, changing Cobra subsidies, and extended unemployment.
Form 5329 is added to Form 1040 to change the early distribution (Code 1) to the appropriate exception code shown in the 5329 Inst.