Estate Tax Deduction – Inherited IRA
I inherited an IRA from a non-spouse last year. I did a trustee to trustee transfer and will continue to take RMD’s using my age as the base (age 30). I have two questions:
1. I have read in the IRS regulations that you can deduct the estate taxes paid on a lump sum distribution from an inherited IRA. I cannot find specific regulations saying that I can deduct the estate tax paid on required minimum distributions each year (since I did not choose a lump sum distribution and will take distributions yearly for the next several years). Is there support that says I can deduct the estate tax paid on the income I receive in each year? This will be a cumbersome task as I will report this deduction for several years as I take out the RMDs.
2. If I can deduct the estate tax each year as I report the income, how do I know what amount of the distribution is deemed to have been from income I inherited and not income earned since the donor’s death? Would it be calculated on a first in first out basis?
Permalink Submitted by Clyde Wolf on Wed, 2008-09-10 01:55
Cameronlaufer,
You can not find the instructions for taking an estate deduction because the IRS does not provide those instructions.
However it is possible to take the estate tax deduction from your annual beneficiary distribution. Ed Slott mentions this in this column: http://money.cnn.com/2000/08/23/pensions/retire_slott/index.htm
How to deduct the estate tax from your annual distribution takes a bit of work. You must first determine that estate tax was paid on the IRA. Then you must calculate the ratio of the IRA to the estate tax. This is referred to In Respect to Decedent (IRD) ratio.
You woul apply that ratio to your annual distribution and subtract that from the taxable amount of the distribution. You must keep track of the amount of estate tax deduction you are taking each year because you can only take the deduction up to the estate tax paid on the IRA. Some year the deduction will be used up.
Here is a link that describes the process with an example. Scroll down about 1/3rd to Avoiding Double Taxation: http://www.bottomlinesecrets.com/blpnet/article.html?article_id=42358
Permalink Submitted by Clyde Wolf on Wed, 2008-09-10 18:17
I need to add that Ed Slott has the IRD Deductin covered in detail in Chapter 6 of his book, Your Complete Retirement Planning Road Map.
http://www.amazon.com/s/ref=nb_ss_b/102-8239440-3416126?url=search-alias…