How much of the $12,000 early distribution from an IRA is subject to the early withdrawal penalty?

When dealing with early distributions from an IRA, it's important to understand the rules surrounding the early withdrawal penalty. Typically, individuals who withdraw funds from their IRA before reaching the age of 59½ are subject to a 10% penalty on the amount withdrawn, unless an exception applies.

In this scenario, the individual is receiving a total distribution of $12,000. However, it's crucial to identify how much, if any, of that amount is exempt from penalties. If the individual had made any contributions to the IRA that have been withdrawn early, those contributions can be taken out without penalty because they are considered after-tax contributions.

However, if the entire $12,000 distribution is considered taxable, then the penalty would apply only to the taxable portion of the distribution. For example, if out of the $12,000, $2,000 represented contributions that have already been taxed, then only $10,000 would be subject to the early withdrawal penalty.

Thus, if it is determined that $2,000 of the $12,000 early distribution constitutes non-taxable contributions, only the remaining $10,000 would attract the penalty. Therefore, the correct answer points to the penalty being applied solely to that amount subject to tax,