IRA Beneficiary

[Christian]

​A client's dad died last year leaving his son as beneficiary on two IRA accounts. The son took full distributions from both accounts with all benefit amounts indicated as taxable. He is not yet 59 1/2 years old. I am unsure as to whether he is subject to the 10% early distribution penalty or being a beneficiary is he excepted from this ?

[Jack from Ohio]

​A client's dad died last year leaving his son as beneficiary on two IRA accounts. The son took full distributions from both accounts with all benefit amounts indicated as taxable. He is not yet 59 1/2 years old. I am unsure as to whether he is subject to the 10% early distribution penalty or being a beneficiary is he excepted from this ?

Taxable, YES. Underage penalty NO, due to it being inherited. I hope he had enough withheld!!

[Christian]

Thanks Jack. As so often is the case the client RARELY checks with their taxman beforehand on something like this. Eager to get his hands on the money he not only cashed out but did not have ANYTHING withheld.   Not looking forward to his pickup appointment.

[Jack from Ohio]

Thanks Jack. As so often is the case the client RARELY checks with their taxman beforehand on something like this. Eager to get his hands on the money he not only cashed out but did not have ANYTHING withheld.   Not looking forward to his pickup appointment.

If he received the money in the last quarter of the year, have him make the 4th quarter estimate for the amount of tax. Then fill out the 2nd page of Form 2210 when you do his 2014 return showing the income being received at the end of the year. It may reduce his underpayment penalty.

[joanmcq]

That's not gonna work if the distribution was in 2013:, which is how I read it.

[Jack from Ohio]

That's not gonna work if the distribution was in 2013:, which is how I read it.

You are correct. I missed the last year part. Filling out the 2210 may reduce it some, depending upon when the distribution took place.

[michaelmars]

was the dad over 59.5?

[Jack from Ohio]

was the dad over 59.5?

Does not matter for inherited IRA.

[jklcpa]

If the estate was large enough to have paid estate taxes, there may be a deduction for income in respect of a decedent.  Here's a snippet that explains how it works:

 

An overlooked deduction.

Most taxpayers and even many tax advisers are unaware of the deduction for 'income in respect of a decedent. But many people who inherit a substantial IRA are eligible for this deduction, which essentially is a deduction for the estate taxes that were paid on the IRA. The deduction is best explained with an example.

Suppose someone left a large estate with an IRA. The estate tax accountant computes that the IRA was responsible for 36.7% of the estate tax paid, and that the IRA's share of the estate tax was $175,000. When the beneficiary takes distributions from the IRA, a miscellaneous itemized deduction (not subject to the 2% floor) of 36.7% of each distribution is allowed. This continues until the beneficiary has deducted a total of $175,000 over the years.

The estate tax accountant should determine the data for the deduction. Details can be found in the IRS Publication 559, Survivors, Executors, and Administrators available free on the IRS web site, www.irs.gov.

[Christian]

Thanks for y'all's responses. The father's estate was not large enough to file an estate tax return. The son's return is for 2013 for which an extension was filed along with a payment. He has that and some withholding. Still he is single and cashed out somewhere in excess of $100,000. The tax bill may not be as bad as I suspect. On the other hand he did not pay Virginia a dime.

[Lee B]

Question: Would this deduction also include any state estate taxes ?

[jklcpa]

Question: Would this deduction also include any state estate taxes ?

 

If you are asking about the post I made regarding the Sch A deduction for estate taxes on IRD, that deduction is limited to the federal estate taxes only, and is allowed only in years in which the recipient reports IRD income. No deduction for state taxes is allowed.

[michaelmars]

Does not matter for inherited IRA.

IT does for some states like in NY

[Christian]

After working for quite awhile on this return I found that one of the 1099-R forms was for an annuity his father owned not an IRA account. He cashed out this as well. Since his dad was born in 1934 it occurred to me the son might qualify for 10 year averaging on the taxable portion of the annuity. The coding in box 7 Distribution Code is 4D. My reading on this indicates this would be a non qualified annuity payment which would not qualify for 10 year averaging. Any input would be appreciated.

[kcjenkins]

Could this be a 403(b ) annuity?  Is it a qualified employee annuity?  Sometimes coding is wrong, and since the dad would have been at or near 80, I'd wonder about this one.  Most annuities pay for a specified length of time or for life, but end when the annuitant dies.  Need more info.....

 

Beginning in 2013, annuities under a nonqualified plan are included in calculating your net investment income for the net investment income tax (NIIT).  Just one more fun detail, but if he took it out in 2012 he misses that bullet.  

[Christian]

Thanks KC. I called to ask the son if this annuity was established through his father's employment but have yet to reach him. I doubt he will be able to supply the answer. The info provided on the back of the 1099-R indicates payment from a non qualified annuity and further that it may be subject to NIT. I suspect I am pressing on a string but if I can help a client I have the responsibility to at least try. I was given to understand his dad had never taken any payments from the annuity so the entire balance was left to him and he chose to cash it out.