Under HIPAA, the 10% excise tax on early IRA withdrawals is not applied if the withdrawal is used for medical expenses that exceed what percent of the individual's adjusted gross income?

• A. 5 percent
• B. 10 percent
• C. 7.5 percent
• D. 12.5 percent

Answer: (C)

The key idea is that the extra 10% tax on early IRA withdrawals can be waived when the distribution is used to pay medical expenses, but only to the extent those medical expenses exceed a certain threshold of the person’s income. That threshold is 7.5% of adjusted gross income (AGI). So once medical expenses surpass 7.5% of AGI, the portion that goes toward those expenses beyond that threshold is not subject to the 10% penalty. For example, if AGI is $100,000 and unreimbursed medical expenses are $8,000, the amount over 7.5% of AGI is $500, and that $500 portion could be free of the 10% penalty. The idea is to allow penalty relief for substantial medical costs relative to income, not for smaller medical expenses.