What is the taxable income for an individual who withdraws $2,000 from a health savings account for non-qualifying medical expenses?

When an individual withdraws funds from a health savings account (HSA) for non-qualifying medical expenses, the amount withdrawn is indeed subject to taxation. In this scenario, a $2,000 withdrawal is made for non-qualifying expenses. The IRS treats this amount as taxable income, meaning it will be included in the individual's taxable income for the year.

Additionally, because the withdrawal was for non-qualified purposes, it incurs a penalty. Normally, withdrawals for qualified medical expenses are not taxed and do not incur any penalties. However, for non-qualifying expenses, there is a 20% penalty on the amount withdrawn, which in this case would be $400 (20% of $2,000). The taxable income would therefore be the full amount of the withdrawal, which is $2,000, but the penalty applied is a separate consideration.

The answer indicates a portion of the withdrawal is treated as taxable income and that there's an associated penalty, which aligns with HSA regulations. However, it should be noted that the correct taxable amount in this case would actually be the full withdrawal, as opposed to just a portion being taxed.

In summary, the individual in this scenario faces a full $2,000 turn into taxable income