The Tax Blotter: Sept. 2020

Generally, if you make withdrawals from a traditional IRA before age 59½, you must pay a 10% penalty tax, in addition to the regular income tax. However, the tax law has created a number of special exceptions.

Know the ABCs. If you tap into your IRA to pay for qualified education expenses, you can avoid the usual 10% penalty. In a new case, a taxpayer in the midst of a contentious divorce withdrew over $50,000 from her IRA with the intention of paying her son’s tuition and living expenses at college. But the Tax Court waived the penalty only for the $30,000 that she paid directly to the college. She owes both the tax and penalty on the remainder (Seril, TC Memo 2021-101, 7/8/20)

Don’t gamble on taxes. The 10% penalty doesn’t apply if you withdraw funds because of a disability. New case: A taxpayer was a compulsive gambler who claimed that her addiction was started by using prescription medication for restless leg syndrome. Eventually, she siphoned more than $100,000 from her IRA to support her gambling activities shortly before she turned age 59½. But the Tax Court said this doesn’t constitute a disability. Her condition was “remediable” and only temporary in nature (Gillette, CA-7 No. 19-1343, 1/15/20).