Is IRA taxed for elder care?

Dear Tax Talk,
If a 65-year-old person withdraws a large amount of money from a taxable IRA to pay nursing home expenses, is that money taxable?
— S

Dear S,
No matter what you do with your IRA money, when it is withdrawn from the account it is taxable income. That is, there are no tax-free uses of IRA money.

When you’re over age 59½, you can withdraw IRA funds without being subject to an additional 10 percent penalty. If you’re under age 59½ when the withdrawal occurs, there are certain exceptions that avoid the 10 percent penalty, but the withdrawal is always subject to income tax.

Ideally, if you need to make a withdrawal from an IRA, the objective is to withdraw as little as possible to minimize your tax consequences. Also, bear in mind that IRA withdrawals increase your adjusted gross income, or AGI, which cause increased taxation of Social Security benefits. It is a double-edged sword.

For example, if you had $10,000 in IRA withdrawals and $18,000 in Social Security benefits, none of your benefits would be taxable and you would owe no income tax. This is because the IRS rules state that if you have income in addition to your Social Security benefits, you add half the Social Security benefits to your other income. In this example, you are still under the IRS federal tax limit.

However, if you withdraw $30,000, for example, then $8,750 of your benefits become taxable and you would owe $3,870 in tax. The extra $20,000 results in an approximately 19 percent tax without counting any state or local income taxes you may owe.

On the bright side, nursing home care is generally considered a medical expense. Hence, part of the tax effect of your IRA withdrawal is offset by a tax deduction.

For example, if you withdrew the $30,000 for nursing home care, which totaled $40,000 (the balance coming out of Social Security benefits), you would owe no federal income tax as a result of the medical deduction for nursing home care. State income taxes vary, so I can’t tell if you would owe the state income taxes.

The key here is not to withdraw more from you IRA than you need to pay the nursing home each year, considering your other resources.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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