very old 8606 non-deductible unused cost basis
What can I do now, with this situation. Contributions to non-deductible TIRAs were made in 1987, 1988, and 1989. Form 8606 was filed in each of those years, tracking the cost basis. ($2000 in each year, total basis amounted to $6000 for each parent.) After father’s death, his TIRAs were transferred to mother’s name, and her cost basis was then $12,000. When she turned 70.5 in 1992 and had to start taking RMDs, the accountant filed 8606 and therefore a small amount of that first year’s distribution (in 1992) was non-taxable.
The next year mother changed to a new accountant. I have looked through every single tax return and see the new accountant never filed any 8606 forms and taxed her full distributions every single year (1993-2007). There is still over $11,000 of cost basis that was never used.
What can I do now? Can I just pick up with the $11,000+ cost basis and start using up some each year now going forward?
Or, do I have to attempt to calculate how much basis would have been used up in each of the previous 15 years (if I can find Fair Market Value info for each year), and only be able to start now with the remaining basis? In other words, was it a use-it-or-lose-it situation which the accountant totally dropped the ball on?
Or, can I do nothing–having, in effect donated the $11,000+ to the IRS?
Permalink Submitted by Alan Spross on Tue, 2009-04-07 04:44
It is very difficult to determine how the IRS may view this. However, since the IRS has been accepting retroactive 8606 forms whether there have been intervening distributions or not, it would appear to be consistent to not require her basis to be forfeited. Just as easily, the IRS may consider that once an 8606 is filed, that the taxpayer cannot select which year to apply the basis. There is probably not enough basis left to warrant the hassle of amending her 2005 through 2007 returns when the final outcome is unknown, but you might try to reintroduce application of her remaining basis effective on the 2008 return, without either forfeiting any of it OR applying extra amounts for the years where none was taken.
Also, the IRS may be slightly more sypathetic to retirees of this age who have been losing their nest eggs than they would have been in prior years.
Permalink Submitted by ray perez on Tue, 2009-04-07 11:43
Thank you. I’m not sure what you meant by “applying extra amounts.” My intention was to either:
– start with the 2008 return and use the $11,000+, then in 2009 use ($11,000+ minus whatever amount I use up in 2008), etc.
or
-amend 2005 or 2006 as my starting year with the $11,000+, amend 2006 or 2007 with ($11,000+ minus amount used up on the 05 or 06 amendment), etc. The tricky part on this is the fact that the 2008 return will likely be e-filed before I have time to mail off older amended returns. So, the IRS would receive things out of sequence. I don’t know if that puts a red flag on the 2008 return.
I called the IRS about this last week, and they didn’t know the answer. They are “escalating” the question and researching it, to see if they can get me an answer, but no guarantee it will be before 4/15, and therefore would eliminate 2005 as a year to possibly amend.
At the taxpayer’s advanced age (upper 80s), and number of years left to likely be able to use up the basis, doing amended returns helps (or she really stands to lose access to the basis, but I think I’d need to do the calculations now, for 05 or 06 and 07 starting with the “picked up” basis, using a lower-by-3-years-usage basis for the 08 return (not the full $11,000+).
Permalink Submitted by Alan Spross on Wed, 2009-04-08 00:12
By “applying extra amounts” I meant adding up the prior basis that was eligible for use but omitted, and applying that total in addition to the 2008 total on the 2008 return. I advised against attempting that. I think your first option is the best, just starting with the 2008 return using the $11,000 plus, etc.
You could also amend the prior few years still eligible for amendment, but the cost of processing these may exceed the benefit. If you are going to do that, I would extend 2008 rather than having it done out of sequence. If this approach is not practical, just start out applying the remaining basis on the 2008 return. Another current poster is contemplating doing a Roth conversion in 2009, and that would use up all the remaining basis all at once. You might consider that as well if the total values and overall tax situation are consistent with that. It would also end RMDs before they start up again in 2010.
Note that if Mother passes before basis has been applied, remaining basis is not forfeited, but passed to the IRA beneficiaries. This is different from capital losses that DO expire with the taxpayer.
Permalink Submitted by ray perez on Wed, 2009-04-08 03:44
Thank you. You’re very helpful.
You’re suggestion about applying the basis toward a Roth conversion may work well. I was planning to convert one of her traditional IRAs in 2009 anyway, and was just contemplating her tax liability on that conversion. (the tax would run about $2000, I believe, 25% bracket on a current account value of approx. $8000). This is a T-IRA in a mutual fund. I know the original non-deductible IRA investments were in bank CDs, back in the late 1980s, so it is unlikely this mutual fund was specifically a non-deductible IRA. I can’t track what rolled over from banks to brokerage, etc. Does it matter? Do non-deductible basis amounts have to be “assigned” specifically to distributions or conversions directly from known non-deductible accounts, or can they be from any T-IRA accounts?
Can I use part of the basis toward the 08 distributions, part in 09 toward a conversion, and have less basis to carry into 2010. (I’ve stopped most of her distributions for 09)
Permalink Submitted by Alan Spross on Wed, 2009-04-08 04:10
8606 basis is not attached to either a specific investment in an IRA OR to any particular IRA account itself. For purposes of application of basis, all owned IRA accounts are considered as one total account. So you can forget about the original source of the non deductible contribution or the IRA it was contributed to. This also means that you could convert from either of the IRA accounts and the basis would be applied the same either way. This is automatically done if you follow the instructions for Form 8606.
Once you have a non deductible basis, a Form 8606 should be included for every year that a distribution is taken applying a pro rated amount of the basis to that distribution, thereby making that portion tax free. The remaining basis is obviously reduced by the amount applied each year. What happened here for many years was overlooking the basis that existed. If the IRS does not balk at reinstating proper use of the remaining basis, you should be OK, but once you start in again be sure to properly complete an 8606 on each tax return. The 8606 for 2008 would reduce the remaining basis somewhat, and a 2009 conversion would apply more of it, further reducing the remaining basis going into 2010, when RMDs must start again.
While there is no 2009 RMD, if you convert during an RMD year, the RMD must be taken out first before the conversion. But the 8606 will apply the basis in exactly the same manner whether it was an RMD or a Roth conversion. The formula is based on the year end value of all TIRA accounts, adjusted for distributions and conversions that reduced the year end balance earlier in the year.