My husband took money out of his IRA for a first time home purchase. Why is it taxing this withdrawal? We only took $5500 which is below the allowed limit.

That use of IRA funds does NOT make the withdrawal non taxable. All it does is exempt you from the penalty for early withdrawal. The distribution remains fully taxable.

I got that but the exemption is listed as none exempt.  Shouldn't it be exempt since it is?

and this is copied from the help area on Turbo tax....

There are several reasons you may not need to pay the 10% or 25% tax for taking an early distribution. For more info, see the details below.

So, now, why are they taxing this when it is a reason that qualifies under the IRS guidelines.

You aren't paying the early withdrawal penalty, you are paying ordinary income tax on the distribution.

I would suggest you google that and look on the IRS website.  You are incorrect.