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Unreimbursed Medical Insurance Payments While Unemployed As Exception to Additional Tax on Early IRA Distribution

Sorry for cross-posting. Time's running out!

I was laid off in mid-November 2005 and started working again in late February 2006. I collected state unemployment compensation for exactly 12 weeks beginning 11/27/2005 and ending 2/19/2006. I withdrew $20000 from an IRA during 2005. I'm 50 years old, so these were early withdrawals. I paid medical insurance premiums, through COBRA, of about $1000 per month in Dec. 2005 and Jan. & Feb. 2006. According to page 48 of 2005 IRS Pub. 590, if I collect unemployment for at least 12 weeks, I should be able exempt the amount I paid for medical insurance from the 10% IRA early withdrawal penalty. My questions are:

Can that 12 weeks straddle 2 years?

Can I exempt $1000 from the 2005 IRA early withdrawal penalty on my 2005 tax return? Can I actually exempt $3000 from my 2005 tax return?

Can I exempt $1000 from my 2005 tax return and $2000 from my

2006 tax return? Thanks, Wally

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Reply to
Wally
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Yes, the 12 weeks can straddle 2 years. Assuming you are a cash basis taxpayer (almost everyone is), you can only count income and expenses in the year paid or received. This means you can only use the $1000 actually paid in 2005 to offset any penalties incurred in 2005 by an early withdrawal of your IRA. No offset can be taken for

2006 unless you withdraw more from you IRA in 2006. Dennis

Reply to
bono9763

The penalty exemption only applies to those medical expenses or premiums that EXCEED 7.5% of your AGI (although you do not have to itemize to claim this exemption). Only the amount spent in 2005 is eligible for the exemption, since that is the year that you withdrew the IRA funds. 2006 would be a different year and would not be eligible unless you made another IRA withdrawal in that year.

Reply to
Herb Smith

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