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Using an IRA to pay COBRA

George SaenzDear Tax Talk,
I lost my job and had to use my IRA to pay for COBRA. Is COBRA a tax deduction? If so, how do I claim it as a deduction?
-- John

Dear John,
The IRS offers a little help when you're out of work. Normally, if you take a distribution from an IRA before reaching age 59½, you have to pay a 10-percent penalty on the withdrawal in addition to including it as income. An exception to the penalty, but not the income inclusion, exists for distributions made to unemployed individuals to pay for health insurance premiums.

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Early distributions are reported on Form 5329 and the form instructions ask if there are any amounts that can be excluded from the penalty. On line No. 2 of the form, you would enter the amount you paid for your insurance premiums. For example, if you withdrew $5,000 and paid premiums of $3,000, you would enter $5,000 on line 1 and $3,000 on line 2. In the space next to box 2, enter exception code '07'. You would pay a 10-percent penalty on the difference of $2,000.

The amount that you pay for health insurance premiums is considered a medical expense deduction. Medical expenses are itemized deductions subject to reduction by 7.5 percent of your AGI. Depending on how much income you have for the year and your other itemized deductions, you might get some relief by claiming the deduction against the income inclusion of your IRA. Include your IRA distribution, the full $5,000 in the case of the example, on line 15a and 15b of your Form 1040.

-- Posted: April 28, 2005





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