IRD Deduction
IRA owner dies with a $270,000 IRA with no cost basis. Non-Spouse Beneficiary is age 58 in year following death, and elects a 27-year stretch. Is the IRD deduction $10,000 per year (270000/27), or is it the actual % of the $270,000 that is taken out each year? In other words, assuming 10% growth, with a year-end RMD, the year two deduction would be approximately $11,000, instead of $10,000.
Permalink Submitted by Alan Spross on Tue, 2007-08-14 23:27
Al,
The full IRD deduction is basically the federal estate tax paid by the decedent less the federal estate tax figure that would have been owed if the net estate was 270,000 less. This figure should be furnished by the preparer of the 706. This assumes that the IRA is the only IRD item in the estate. There is no way the full IRD deduction should exceed 50% of the IRA value based on current estate tax rates of just under 50%. For example, let’s say $120,000. is the full amount of the estate tax that qualifies for the IRD deduction.
For the first RMD of 10,000, the deduction is 10/270 or 3.7% of 120,000 or $4,440. If the following year RMD is 11,000, the IRD deduction for that year would be 11/270 or 4.07% which is $4,884. When the 120,000 is exhausted the deduction expires, and that would be sooner with a good return on investment. Consider this example an abbreviated summary of the full process.
Permalink Submitted by [email protected] on Wed, 2007-08-15 01:42
Sorry, I had a brain freeze. I should have said the taxes on the 10,000, 11,000, etc. But I see your calculation, it is not the taxes/27, it is the proportion of the taxes allocated to each death RMD. With any amount of growth exceeding the RMD, the deduction would be used up prior the year 27.
One follow up on NQ annuities: If the owner annuitized (many do now with the hybrids available), and dies during the acces period or certain period, there will be a death benefit available. If there is gain left, the IRD deduction is also available. Interestingly, payments to a non-spouse bene come out FIFO, and non taxable until basis is used up. I guess that would mean no IRD deduction until gain is reached, correct?
Permalink Submitted by Alan Spross on Wed, 2007-08-15 03:20
I will try to paste the IRS Reg here, which is 1.691(d)1 per Pub 559. I have never looked into this before, but a cursory review leaves me with the impression that the IRD deduction is allowed as a flat % of the gross distribution regardless of how much is taxable in any given year. The calculation itself is rather tedious, but if the entire Reg is pasted, you can see the examples.
http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A…