To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes:
- Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see chapter 7),
- The tax-free part of scholarships and fellowships (see chapter 1),
- Pell grants (see chapter 1),
- Veterans' educational assistance (see chapter 1),
- Employer-provided educational assistance (see chapter 11), and
- Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
Do not reduce the qualified education expenses by amounts paid with funds the student receives as:
- Payment for services, such as wages,
- A loan,
- A gift,
- An inheritance given to either the student or the individual making the withdrawal, or
- A withdrawal from personal savings (including savings from a qualified tuition program (QTP)).
If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax.
In 2008, Erin (age 32) took a year off from teaching to attend graduate school full time. She paid $5,800 of qualified education expenses from the following sources.
| ||Employer-provided educational assistance |
| ||Early distribution from IRA|
(includes $500 taxable earnings)
| ||Savings account||1,100|| |
| || || || |
Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses.
| ||Total qualified education expenses||$5,800|| |
| ||Minus: Tax-free educational assistance||−1,500|| |
| ||Equals: Adjusted qualified |
education expenses (AQEE)
Because Erin's AQEE ($4,300) are more than her IRA distribution ($3,200), she does not have to pay the 10% additional tax on any part of this distribution. However, she must include the $500 taxable earnings in her gross income subject to income tax.
Assume the same facts as in Example 1, except that the assistance from Erin's employer was delayed (not received until July 2008), so she withdrew $4,500 from her IRA instead of the smaller amount. This included $700 of taxable earnings, which must be included in her income subject to income tax.
Erin's IRA distribution ($4,500) is larger than her AQEE ($4,300). Therefore, she must pay the 10% additional tax on $200, the amount of her distribution ($4,500) that is more than her qualified education expenses ($4,300), but not more than the taxable amount of her distribution ($700). She does not have to pay the 10% additional tax on the remaining $500 of her taxable distribution.taxmap/pubs/p970-042.htm#en_us_publink100021089
Assume the same facts as in Example 1 and Example 2, except that Erin's early distribution from her IRA was $5,500 (including $850 of taxable earnings). The excess of her distribution ($5,500) over her qualified education expenses ($4,300) is $1,200. Because the excess distribution ($1,200) is greater than the taxable earnings ($850), Erin must pay the 10% additional tax on the entire $850 of taxable earnings.