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 8),
- 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 12), 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 2009, 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)
| || || || |
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|| −5,000 || |
| ||Equals: Adjusted qualified |
education expenses (AQEE)
Because Erin's AQEE ($800) are more than the taxable portion of her IRA distribution ($500), 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 Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher — $1,000. This must be included in her income subject to income tax.
The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). She does not have to pay the 10% additional tax on the remaining $800 of her taxable distribution.