How to Take Medical Hardship IRA Distributions on a Tax Return

by Alia Nikolakopulos

All distributions you receive from your individual retirement account (IRA) are subject to income tax. However, if you withdraw IRA funds before you reach age 59 1/2, your distribution is also subject to a 10 percent early withdrawal penalty. The IRS waives a portion of the early withdrawal penalty for taxpayers below retirement age when the taxpayer experiences financial hardship and uses the IRA funds to pay for necessary medical expenses.

1. Receive Form 1099-R from your retirement plan administrator. The 1099-R lists the distribution you receive during the year and the taxable amount of your distribution. Report the amount shown in Box 1 of the 1099-R on Form 1040, line 15a. Report the amount shown in Box 2 of the 1099-R on Form 1040, line 15b. If there is not an amount in Box 2, you must also report the amount in Box 1 on Form 1040, line 15b.

2. Prepare the rest of your Form 1040 income tax return through line 37. The amount on line 37 is your adjusted gross income.

3. Obtain IRS Form 5329, Additional Taxes on Qualified Plans. Use this form to report your medical hardship exception and claim your exemption from the early withdrawal penalty. Form 5329 is available on the website.

4. Provide the name and identifying information of the taxpayer who receives the distribution at the top of Form 5329. On line 1, enter the amount from Form 1040, line 15b. This is the amount of your IRA distributions subject to income tax.

5. Multiply your Form 1040, adjusted gross income, by 0.075 (7.5 percent.). The early withdrawal penalty for medical hardship is waived for distribution amounts that exceed 7.5 percent of your adjusted gross income.

6. Determine the amount of your taxable distribution that was used for medical expenses. Subtract 7.5 percent of your adjusted gross income from your medical expense IRA distribution. The result is the amount you may exclude from the early withdrawal penalty.

7. Enter the amount of taxable distribution that is exempt from the early withdrawal penalty on Form 5329, line 2. Enter code 05 in the box to the left of line 2.

8. Subtract line 2 from line 1 on Form 5329. Enter the result on line 3. Multiply line 3 by 0.10 (10 percent) and enter the result on Form 5329, line 4. This is the amount of penalty you must pay on your early IRA distribution. You must also report the penalty on Form 1040, line 58.

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