QCDs from Inherited IRA with after-tax basis
72 year old client has inherited traditional IRA from her father that has about 25% after-tax basis. Is there a way to do QCDs with the pre-tax money and take the after-tax money as a direct distribution to avoid taxes on the pre-tax money and not ‘waste’ the tax free distribution on the after-tax basis?
Terry Ford
Permalink Submitted by Alan - IRA critic on Sat, 2021-08-07 21:13
Yes, there is a way and in fact that is what the tax code requires. Until the entire pre tax value of the inherited IRA is used up, the QCD is deemed to come exclusively from the pre tax (taxable) portion of the inherited IRA. This is reported according to the Form 8606 instructions. A QCD is not reported on line 7 of Form 8606, but annual distributions in excess of QCDs are reported on line 7 and the inherited IRA basis is pro rated only for this portion. In addition, if client exhausted the 75% of her pre tax inherited IRA value, the rest of the donation would not be treated as a QCD, but would be eligible for an itemized deduction. So if client donated 75% as a QCD, the remainder of the balance could be distributed tax free and kept or donated subject to a possible itemized deduction.