Basis Distributed Before Gains
Gentlemen- we work with a CPA who believes he has read an article a while back (he did not print a copy) which stated there are instances whereby an IRA Owner could declare the distribution he took last year could be IRA basis rather than the interest/ gains held in the Traditional IRA. There are not any special considerations, refunds, or corrections involved. The IRA Owner is over 59 1/2, took a distribution from an IRA which had some basis in it from years ago & he simply does not want to pay income tax on it (or at least some of it…I do not know dollar amounts involved). The associated 1099 simply declares the full amount taxable while also stating the company could not fully determine the taxable amount. The CPA is looking for a way to help his client. Have you heard of this ability to declare basis on a IRA Distribution when there are gains in the IRA. We have worked with IRA’s for many years & I have always understood all IRA distributions are considered taxable unless there is some mitigating circumstance involved. Do you know of something akin to what the CPA is thinking? Thank you for your help. -Ed
Permalink Submitted by Alan - IRA critic on Tue, 2016-03-15 17:10
If a taxpayer has made non deductible contributions to the IRA (non Roth), a Form 8606 must be filed each year to report this IRA basis to the IRS. Each 8606 tracks the cumulative basis in the IRA and any distributions taken are pro rated with the % of basis determining the non taxable amount of the distribution. This calculation is also made on Form 8606 in the year of distribution. If by chance the taxpayer did not file the 8606 for a prior year, they can submit one retroactively, but must also update any later 8606 forms to reflect other non deductible contributions. Quite simply this is all handled by the various 8606 forms. The 1099R is correct as issued since IRS instructions are to show the entire distribution as taxable. The 8606 overrides this amount and determines the actual taxable amount, and also shows how much basis remains to be carried forward. The form only applies basis pro rata, so until the IRS is totally drained there will always be some basis remaining shown on line 14.
Permalink Submitted by Ed Farmer on Tue, 2016-03-15 20:20
Alan- Thank you. This helps. -Ed