Discussion:Taxability of IRA that is inherited
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Discussion Forum Index --> Tax Questions --> Taxability of IRA that is inherited
Steveblundell (talk|edits) said: | 7 June 2006 |
| Do heirs have to pay any tax on IRA's that are left to them? | |
| 7 June 2006 | |
| If you are refering to a traditional IRA , 401k or 403b then typically yes when they distrbute the money they will incur taxes. However a spouse can rollover anyone of these into her IRA and forgo paying any taxes until she/ he distributes the money. | |
| 7 June 2006 | |
| There are requirements that are specific as to whether the deceased has begun distributions or not, whether it's a spouse or not. But yes, income taxes will be paid by the beneficiary of retirement funds. These and bonds are about the only exceptions to the rules that those inherit pay no tax on inheritances. Until Dennis gives us a longer list. | |
| 7 June 2006 | |
| Tax gets paid only after withdrawal is made and reported on tax returns. | |
| 12 June 2006 | |
| Also, if the decedent has basis (non-deductible contributions)in his traditional IRA, that basis carries over to the beneficiary. | |
Sfhurrell@hotmail.com (talk|edits) said: | 12 June 2006 |
| Also if estate tax was paid you can take a deduction on Schedule A to offset the income as it is withdrawn. | |
Michaelstar (talk|edits) said: | 12 June 2006 |
| This is also called the IRC sec 691(c) deduction if estate tax was paid. It is not subject to the 2% floor (agi adjustment/phase out) and it is an add back for California as California does not allow this deduction. | |
| 14 June 2006 | |
| This deduction is only allowed once the distributions are made, correct? What if the estate taxes were paid in 2005 but the income was taken over several years? Where do you place this deduction on the Schedule A? | |
Michaelstar (talk|edits) said: | 14 June 2006 |
| The estate taxes paid is based on the principle of the IRA at date of death as reflected on the Federal Form 706. The sec 691(c) deduction is prorated over the time line that this IRA is received by the beneficiary. The IRA value on the 706 represents the basis in the estate tax paid. So as the IRA grows over time, the 691(c) deduction only relates to the original basis and not the growth. Do not confuse what I am calling basis as the entire IRA received is fully taxable.
Lets say IRA is valued at $1,000 and the beneficiary pays $100 in estate tax. For every $10 they receive, they will have a $1 sec 691(c) deduction. Example - year 1 - 1099R = $100 and there is no growth in IRA originally valued at $1,000. Estate tax paid = $100, therefore - Year 1 - sec 691(c) deduction = $10. Year 2 - 1099R = $100 but based on the appreciation - only $90 of $100 is from IRA value at death. Sec 691(c) deduction = $9. The sec 691(c) deduction does not relate to any appreciation in the IRA received. I set up a Lotus spreadsheet and track these figures annually so in case of audit - it will all be very clear what I am doing for the agent to review. I hope this does not confuse you but once you work through the numbers, it will become clear. It is the same principle as when a t/p has both a traditional deductible and non deductible IRA. Each year the t/p reports the total 1099R but only reports as taxable that % to the total received that was taken as a deduction. Very similiar concept. | |
Michaelstar (talk|edits) said: | 14 June 2006 |
| ps to answer the other part of your question - it goes down on the bottom of Schedule A - Other Miscellaneous deductions - same place as gambling losses. | |
