Interview Notes • Luther, age 54, and Lexi, age 56, are married and file a joint return. • Lexi has family coverage through her High Deductible Health Plan (HDHP) at work. In 2023, Lexi contributed $2,350 to her Health Savings Account (HSA). Luther made contributions totaling $3,000 to his HSA in 2023. • Luther's Form 1099-SA shows a distribution from his HSA of $3,000. They have receipts showing they paid: o $300 for new eyeglasses for Lexi, o $2,200 in copays for doctor visits and tests, o $400 for over the counter medication, and o $100 for Personal Protective Equipment (PPE) to prevent the spread of COVID-19 and home COVID-19 tests • In April 2023, Luther was diagnosed by his physician with a terminal illness. In May, Luther and Lexi decided to take a luxury vacation before his health deteriorated. They used a distribution from Luther's IRA to pay for it. They received a Form 1099-R showing $15,000 in Box 1, and code 1 in Box 7. • Lexi sold a used handbag on an online marketplace. She received a Form 1099-K reporting the $700 sale. She originally paid $1,000 for the bag. 8. Luther qualifies for an exception to the additional tax on early distributions. a. True b. False

Based on the information provided: 1. HSA Contributions: For 2023, the IRS allows individuals with family coverage under an HDHP to contribute up to $7,750 to an HSA. Lexi and Luther's combined contributions of $5,350 ($2,350 from Lexi and $3,000 from Luther) are within the limit. 2. HSA Distributions: Luther's HSA distributions total $3,000. As long as the distributions are used to pay for qualified medical expenses, they are tax-free. The expenses listed (eyeglasses, copays, over-the-counter medication, PPE, and home COVID-19 tests) are all qualified medical expenses, assuming the over-the-counter medication was prescribed. The total of these expenses is $3,000, which matches the distribution, so the entire distribution should be tax-free. 3. IRA Distribution: The distribution from Luther's IRA is generally subject to income tax. Since code 1 is indicated in Box 7 of Form 1099-R, it suggests that the distribution is an early distribution and may be subject to an additional 10% tax unless an exception applies. 4. Exception to the Additional Tax on Early Distributions: If Luther was diagnosed with a terminal illness and meets the IRS definition of being disabled, he may qualify for an exception to the 10% early distribution tax. The IRS defines "disabled" as being unable to engage in any substantial gainful activity due to a

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