Non-Spouse Inherited IRA Basis
Is there another way to establish basis of an inherited IRA besides having the Benefactor’s previous 8606 (which we do not have).
I inherited my father’s IRA and was required to take a $10,032 disbursement which I then rolled directly into my own IRA.
In doing taxes, it asked if the previous owner had non-deductible basis. I know that he did as his contributions were post-tax.
However, instructions for form 8606 state a different way of figuring basis than what I typically think of (historical cash value of initial investment) and if I follow those instructions, then it leads me to the conclusion that the full amount of disbursement is taxable with a basis of $0.
Am I interpreting it right that basis is not the same basis I think of when it comes to capital gains? Is there a way to lessen the tax burden if my father’s original basis of the IRA I inherited was roughly 50% of the ending year value?
Permalink Submitted by Alan Spross on Sun, 2012-09-23 00:52
First, you cannot roll over an RMD from your own or an inherited IRA, so you have a problem here if you reported a rollover on line 15 of your 1040. Your distribution (except any basis) is taxable. If you qaulified for a regular contribution to your IRA (5k or 5,500k) you could treat that much as a regular contribution, making the excess contribution to your IRA equal to 10,032 less what you were eligible for. This is a problem you should address regardless of any basis in the inherited IRA.
If your father did have basis, but never filed an 8606, I do not know how the IRS would react to a beneficiary filing an 8606 retroactively for the decedent, even though they accept these from IRA owners. Documenting basis could be a major project for you. You would need to come up with both the prior tax returns and prior TIRA contribution records (either from IRA custodians or Form 5498 forms issued by those custodians). Comparing those two factors you would be looking for years where there was both a contribution, but no deduction listed on the return.
There is no other basis other than from non deductible contributions. There are no capital gains in IRAs so the performance of the investments is immaterial. Basis is the simple total of non deductible contributions plus the rollover of after tax amounts from an employer plan since 2002. You would have to subtract the removal of any excess contributions along the way. That amount as a % of the adjusted year end value of the inherited IRA is the tax free portion of your distribution.
To get an idea of how much work this would take, consider how many different IRA custodians he used and the condition of his tax records. I presume he did not use a tax professional of any 8606 forms would have been filed.