Inherited IRA with basis, form 8606, TaxAct

Submitted by robert axelrod on Fri, 2018-01-19 07:14

I inherited a small traditional IRA in 2017 from my mom, who had already started taking RMDs. I took her RMD last year (for 2017). She had basis in her IRA and I have the form from her accountant which shows how much. Now in doing my taxes, I cannot see how to indicate this in TaxAct. But I googled this problem online, and found this link:

https://www.taxact.com/support/21070/2017/ira-inherited-form-8606

Which says:

Inherited traditional IRA distribution with basis and did not own traditional IRA distributions. If you took a distribution from a traditional IRA you inherited which had a basis, and had no distributions from IRAs which you own, figure the taxable amount of the inherited traditional IRA distribution using the Retirement Plan Distributions Worksheet after entering the distribution on Form 1099-R. File a paper return and include all copies of Forms 1099-R and 8606.

Now I found a similar, older thread where Alan and spiritrider commented about this same problem and observed this might be a tax software problem. Four years later, is that still the case? In other words, there is no work around, no way to avoid having to paper file? This implies I will have to paper file for as long as I keep this IRA, and take RMDs, correct? If that is the case, her basis is high enough as a percentage that I will likely close out the IRA this year to avoid the problem in the future. Of course it’s too late for 2018.

Flag as spam

Permalink Submitted by Alan - IRA critic on Fri, 2018-01-19 16:57

If anyone sees this and knows of a tax program that does support inherited IRA basis, please post.
You will have to weigh the importance of continuing to use Tax Act and paper file, filing with a different tax program, using a tax preparer with professional software, forfeiting the basis, or taking large distributions to shorten the duration of this problem. Taking larger than RMD distributions to eventually fully distribute the inherited IRA will cost you more than paying a professional provider UNLESS you are not maxing out your own workplace plan contributions like a 401k. In that case, you could take the large distributions and offset the taxes by increasing your pre tax 401k or similar contributions. Not only that but your own RMDs are probably a few years away and would be calculated with a much lower distribution % than an inherited IRA. Some combination of all these ideas might also be considered. Of course, you said the balance was small and that has a major effect on your choice of options.
Lack of tax program support is also aggravated by having to maintain separate 8606 forms in cases where the beneficiary IRA and the owned IRA both contain basis. In that case, the IRA that any 8606 applies to must be identified using an explanatory statement or comparable.
Not sure if your mother completed her 2017 RMD or not, but if not you should have completed it by 12/31/2017 and would get a 1099R to report on your return. If not, then you need to file a 5329 to get the penalty waived, and the IRS would almost always approve the waiver. Otherwise, your first beneficiary RMD is not due until 12/31/2018 so you have plenty of time to consider the options. To file in 2018, you will need to secure the remaining basis figure from the 2017 8606 (if any) on your mother’s final return. Her accountant has not filed that final return yet (and I wonder if he knows to enter the date of death value for her 2017 8606 instead of the year end value. For 2018, you would use the 12/31/2017 value of the inherited IRA.

Permalink Submitted by robert axelrod on Sun, 2018-01-21 08:22

Thank you Alan,It has a basis of about 50%, and the total is only about $50k. I can avoid having to deal with this for many decades by simply distributing 100% of the IRA during 2018, and paying ordinary income taxes on the ~$25k, correct?I already max out all retirement accounts.I do a backdoor Roth IRA each year, which requires an 8606. Does this create additional complications?

Permalink Submitted by Alan - IRA critic on Sun, 2018-01-21 15:34

No additional complications, just the tax bill on the 25k taxable amount and how you file the return given the inherited IRA 8606.

Permalink Submitted by robert axelrod on Mon, 2018-01-22 06:06

deleted for the time being while I sort out

Permalink Submitted by robert axelrod on Tue, 2018-05-01 01:06

TaxAct helped me through the forms and they do have the ability to handle the questions, but i still have to print and paper file.
However, I am confused because in order to complete form 8606 I have to include the total of all inherited IRAs on Dec 31 2017. If I put down all my inherited IRAs including my father’s (my mom and dad both passed away in 2017), since his was much larger than hers I get a non taxable distribution amount which is equal to about 70% of the total RMD I took from her account. If I put down just my mom’s IRA I get a non taxable distribution amount about 10 times larger than her RMD. So is it correct to put the total of all inherited IRAs from both my mom and my dad?
In round numbers:
dad’s IRA: $875k. RMD was $50,000
mom’s IRA: $25k of which 50% is basis. RMD was $1000.
If total inherited IRAs is listed as $900k, I get a non taxable distribution of $700
If total inherited IRAs is listed as $25k, I get a non taxable distribution of $9000.
Finally, why is the non taxable distribution of $700 correct? Shouldn’t it be closer to $500, since the basis was 50%? Or is there interplay with some other income?
We had two other 8606s this year, each one for a backdoor Roth IRA with $5500 in basis. No gains accrued between the non deductible IRA contribution and the conversion.

Permalink Submitted by Alan - IRA critic on Tue, 2018-05-01 02:55

No, your inherited IRA basis for the inherited IRAs of different decedents must be kept separate. See p 5 of Pub 590 B. Since your Dad’s IRA apparently had no basis, your RMDs from that inherited IRA will be fully taxable and no 8606 will apply. Your mother’s IRA had basis which is not combined with basis for your own IRA, and the basis for RMDs from her inherited IRA are reported on an 8606 showing only that basis and only the value for that inherited IRA. The taxable amount for that RMD should be 500. All 50k from Dad’s inherited IRA is taxable.
So it appears you will have an 8606 for each spouse, and another one for the distributions from your mother’s inherited IRA. All are independent of each other.

Permalink Submitted by robert axelrod on Tue, 2018-05-01 05:32

thank you alan,

and in line 6 on form 8606 for the inherited IRA, do I put the total of mom‘s and dad’s inherited IRAs?
what is perplexing to me is TA is calculating that an amount equal to about 75% of mom’s IRA RMD should be non taxable, when her basis is only 50%. it must be driven by something going on on dad‘s inherited IRA because before I entered his information, TA was correctly determining that my mom’s RMD was 50% taxable. After adding my dad’s, who has no basis, the taxable portion of all inherited IRA RMDs went down, not up. I even deleted all the forms and reentered them to isolate the problem.

Permalink Submitted by Alan - IRA critic on Tue, 2018-05-01 18:05

No. Line 6 would only show the year end value of the IRAs that the basis applies to. Your dad’s IRA had no basis so that inherited IRA would never have an 8606 and you would not show the value of the IRA inherited from Dad on any other 8606.
It is not clear why you are getting a distorted result. If you incorrectly added dad’s IRA value to the 8606 it would reduce the amount of basis applied. This may be caused by the tax program not supporting more than one 8606 for each SS number. Your spouse has a different SSN, so a separate 8606 for the spouse should be supported, but probably not more than one for your own SSN, and the inherited IRA from mom now calls for a second 8606 for you in addition to your own 8606.
Probably all boils down to having to do a paper return as long as the inherited IRA from mom remains. Not sure, but my impression is that this is a common problem with retail tax programs, not just Tax Act.

Permalink Submitted by robert axelrod on Wed, 2018-05-02 06:22

On my printed 8606 for the inherited IRA, line 6 says, “Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2017” (emphasis IRS). In the TA questionnaire it says to enter the value of all inherited IRAs; here it doesn’t make that distinction; but in neither case does it say to limit the valuation to just the decedent in question. How is one to know this?
[Regardless it does not say to enter just the inherited IRA with basis, and so the figure on that line is $900,960 (the value of all inherited IRAs). The value of all distributions (RMDs) from these inherited IRAs in 2017 was $52,817, and that figure is listed on line 7 of this 8606 (not the $1000 or so distribution from just mom’s IRA). Thus the ratio in line 10 is 0.014481 and that is how the nontaxable distribution amount came to $765. It seems to be because I am required to add the 2017 distributions plus the 2017 year end valuations and then divide the basis by that figure – hence the ratio in question is not the percent of the IRA which has basis (50%) but rather the percent of the total of (distributions plus year end value) which the basis represents.]
So: is this then in error? Should Line 6 really just list the value of the inherited IRA from mom, and line 7 the value of the RMDs from mom?

Permalink Submitted by David Mertz on Wed, 2018-05-02 11:55

The Form 8606 calculating the taxable amount of the distribution from the IRA inherited from your mom is to show only the distributions from the IRA Inherited from your mom, the basis from your mom, and the year-end balance in the IRA inherited from your mom. Anything regarding IRAs of a participant other than your mom must be kept entirely separate.
If the 2017 year-end value of your mom’s IRA was $25k, basis is $13k and the distribution was $1k, the Form 8606 for the distribution from the IRA inherited from your mom should have $13k on line 2, $25k on line 6 and $1k on line 7. The ratio on line 10 will be 0.500. The result on line 13 will be that $500 of the distribution is nontaxable and the basis remaining on line 14 will be $12.5k.

Permalink Submitted by robert axelrod on Wed, 2018-05-02 13:43

DMX and Alan, you have both been very helpful and I am tremendously appreciative.
The problem is that I am not given the option to enter only the info about the inherited IRA with basis into line 6 on this 8606. The Taxact Q/A does not seem to recognize the possibility that one could have inherited IRAs from two different decedents, one with basis and one without. Thus it automatically aggregates the total of all inherited IRAs as if from one decedent. If I manually enter just the info from mom’s inherited IRA with basis in that line, it throws off the rest of the return because I still have the income from dad’s IRA that I previously had to enter
At this point, it sounds like a TaxAct problem if I am understanding the two of you correctly. That is, TA is wrongly combining the total of all inherited IRAs, and it shouldn’t.

Permalink Submitted by David Mertz on Wed, 2018-05-02 14:58

In comparison, TurboTax accommodates this situation differently. TurboTax does not support the preparation of any Forms 8606 for distributions from inherited IRAs with basis. Instead, TurboTax requires that the user prepare the necessary Form(s) 8606 separately from TurboTax, enter the taxable result for each code 4 Form 1099-R entered, then paper-file with the manually prepared Form 8606 included with the forms printed by TurboTax. Less convenient than TaxAct for users who have IRAs inherited from only one individual, but it does accommodate your situation.

Permalink Submitted by Alan - IRA critic on Wed, 2018-05-02 15:28

In similar fashion, if you passed and Mom’s IRA passed to a successor beneficiary named by you, and that beneficiary also inherited your own IRA with it’s own basis, that beneficiary would also have to file an 8606 for each inherited IRA, could not combine the inherited IRAs and would have different RMD divisors for those IRAs. In other words, your successor beneficiary would also inherit your filing challenges unless tax software providers feel there is enough of these situations to fully support them. The IRS also needs to provide more detailed guidance in Pub 590 B and the 8606 Inst.

Permalink Submitted by robert axelrod on Wed, 2018-05-02 17:20

DMX, the way TT handles this situation hints how I may do things with TA.
I plan to do my inherited 8606 by hand, with the correct figures. I will then use those figures on Form 1040 line 15b as 8606 instructs; then manually calculate the rest of my tax (sigh, I guess including AMT, Medicare tax, and NIIT) by hand. Thus I will use the printed TA forms as a start, but have to manually complete various other forms by hand, including the 1040.
You may wonder why I don’t just pay a professional. I would, however in 2013 I bought a rental property and made some improvements, etc., so I’ve been depreciating expenses since then. Somewhere in TaxAct the memory of my entries from 2013 live on, carrying forward my depreciation each year. The prospects of finding that info, sorting through it, and giving to a professional to do is somewhat discouraging.

The Retirement Savings Time Bomb Ticks Louder

Live Advisor Training with America's IRA Experts

The Retirement Savings Time Bomb Ticks Louder

Inherited IRA with basis, form 8606, TaxAct

Add new comment Cancel reply