Withholding from 401k distribution

[LeslieMSmith]

My mother has a 401k. She went into a nursing home in August of this year. Her monthly distribution went from roughly 750 a month to 8000 a month. We set the withholding to 10% but we have been told that is too high since 95% of her expenses are to the nursing home. 

My question is what percent do you recommend we set as the withholding?

[K M W]

Hi, Leslie!  I hope your mother had a smooth transition to the nursing home.

The answer to your question is not quite straightforward, as the answer depends on the reasons she entered a nursing home, to determine if she will be able to deduct the costs on her Schedule A, itemized Deductions, and then what the dollar amount of the deductions would be.

First, the distributions from the 401k will be reported on a Form 1099R, and the amount in the taxable amount box will be reported as income.  It's important to note that, if your mom is receiving social security, then the increase in the 401k distributions MAY cause more of her social security to be taxable on the return as well. Social security can be 0-85% taxable, depending on the amount of income reported on the tax return.  Based on receiving $8,000 a month from her 401k for 5 months of 2022, she will be at the higher amount of what percent of social security benefits are taxable to her.

The second issue is whether or not she can deduct the costs of the nursing home as an Itemized Deduction on her tax return, as a Medical Expense. Keep in mind that qualified medical expenses can only be deducted to the extent they exceed 7.5% of the taxpayer's adjusted gross income (AGI).  So, if her AGI on the 2022 tax return is, say, $55,000, then the first $4,125 of medical expenses are not deductible.

In your mom's situation, the cost of living in a nursing home, home for the aged, or similar institution, including meals and lodging, is deductible if a principal reason for being there is to get medical care. If the taxpayer is in a facility for personal reasons, only the part of the cost that is for medical or nursing care is deductible.

The question is - was the principal reason mom moved to the nursing home for medical care? if so, then the costs of living there are considered qualified medical expenses.  IRS Publication 502, Medical and Dental Expenses, provides more details on what costs can qualify as deductible medical expenses - see the link to this IRS Publication here: IRS Publication 502 

Finally - to address your question of withholdings, the answer really depends on crunching the numbers. You would have to calculate what her total taxable income is (the total of the taxable 401k distributions, plus any taxable Social Security benefits, plus any other taxable income she receives) less her itemized deductions (which include any qualified medical expenses)  and determine what the taxes will be on that amount.