10% exception for medical expenses | Ed Slott and Company, LLC

10% exception for medical expenses

Client had medical expenses of 20k - put them on a credit card and are behind on payments. Looking at a withdrawal from IRA to pay the bills - what are the specifics to be able to claim an exemption to the 10% penalty. I understand the 7.5% AGI requirement - do expenses have to occur in the same year as the withdrawal? What about who actually receives payment - in this case it will go to a credit card company - not a health care provider (although they are the ones that turned it over to collections) is this a problem?

When client charged the bills to the cc, that constitued payment of the medical costs in the year charged. Essentially, the bills have been paid in the same manner as if he took out a loan and paid the bills and then defaulted on the loan payments. For the IRA distribution therefore, it must be taken in the same CY as the charge was made to the CC. If the charge was made in 2011 and the IRA distribution is taken in 2012, the penalty on the IRA distribution cannot be waived, at least for the payments already charged. In summary, the distribution and year of payment must be the same. But the bills can be incurred before that year, and charging the bills to a CC constitutes payment of the bills, whereas payment of the cc past due balance does not. NOTE: For taxpayers whose medical deduction floor will be increased under the ACA from 7.5% of AGI to 10%, the IRA penalty exception will also incur this increase to 10%.

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