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Posted by D. Stussy on May 5, 2008, 12:51 am
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> > > On May 3, 1:25 pm, bl...@triad.rr.com wrote:
> > > > Between my tax class and settling my mother's estate, I've been here
> > > > alot lately.
> > > > Thank you all for your help.
> >
> > > > Now - with my mother's estate, I am inheriting a traditional IRA
> > > > valued at about 20K. The plan was to take it and put it into an
> > > > inherited IRA, taking the minimum required distribution each year
and
> > > > decaring it on my income taxes. Now, as I;m stufing for finals, I
see
> > > > in my book mention of a "seldom used and usually misunderstood"
> > > > section of the tax code, 691(c), that will allow me to take a misc
> > > > deduction for the amount of tax that is paid by the estate for the
> > > > value of the IRA. If I understand the book correctly, the estate tax
> > > > paid on the traditional IRA (45% of 20K), could be a deduction on my
> > > > incomce taxes.
> >
> > > The deduction is only available if you itemize and it is part of the
> > > miscellaneous deductions which are reduced by 2% of adjusted gross
> > > income.
> >
> > Wrong. The ETD is NOT subject to the 2% AGI floor. - IRC 67(b)(8).
> >
> > Also, the OP's assumption that the estate tax attributable to this IRD
is
> > simply going to be the estate tax bracket percentage of the IRD is
wrong.
> > The computation is alot more complicated than that. Firstly, the estate
tax
> > attributable to ALL IRD is the difference between return estate tax and
> > estate tax recomputed by excluding all IRD and all liabilities
deductible
> > for income tax purposes per 691(b). For IRD purposes, any post-tax basis
> > (for an IRA, non-deducted contributions) are taken into account. Once
the
> > estate tax on all IRD is determined, it is allocated by simple ratio to
each
> > IRD item according to its amount. For payments over time, the estate tax
is
> > further allocated over the period designated.
> >
> > > > However, if I stretch out the IRA, the deduction would have to be
> > > > taken each year based on the amount of my distribution. The
> > > > calculations sound like they could really get messy. As such, am I
> > > > better off taking the whole distribution in one year and taking the
> > > > full 45% of 20K as a deduction?
> >
> > > You will have to run the numbers for both alternatives. Technically,
> > > you should consider the time value of money in making your final
> > > decision.
> >
> > Agreed, but also note that as this is an itemized deduction, it is also
> > subject to whether one's total itemized deductions will exceed the
standard
> > deduction in future years. Amortizing the ETD isn't the messy part.
>
> "For payments over time, the estate tax is further allocated over the
> period designated."
>
> But - is this a complicated formula that will be dependant on the
> amount of the distribution from the inherited IRA, or is it just a
> straight line percentage based on the number of years I would be
> getting a distribution?
It is a simple formula based on the amount of the distribution as it
compares to the amount used in the IRD computation to determine the
attributable estate tax. It's not a complicated formula, nor is it based
over time. However, as you suggested that the payments would be RMDs, that
implies that the ETD would be a fixed number each year as the IRD itself
would be fixed.
> And the fact that I may not be able to itemize in future years is
> another point to take into consideration.
> THIS IS TOO COMPLICATED!!
>
> So - I can ignore the whole mess, just take an inherited IRA and get
> the tax deferral and tax free growth, or take it all at once and get
> the misc itemized deduction. The deduction being the amount of tax
> the estate paid based on the value of the IRA. This should be just
> asking the lawyer to run the return with out the IRA, (I believe,
> hope, there are no other IRD items in the estate), and then the
> difference will be the tax attributed to the IRA. Take what's left
> and put it into an IRA, or vinyl siding.
>
> Right??
No. You are still ignoring income-tax-deductible liabilities, as I stated
above. Whether you take it in parts or all at once doesn't alter that an
ETD is still present. As far as "take what's left ...", you can't put it
into another IRA that way. You don't get the rollover option either as the
IRA was held by your parent, not your spouse. As noted (in your simplified
view), 45% of $20K (which will probably be close to the correct number) is
$9k, and if you're single, that by itself exceeds your standard deduction if
distributed in a single year.
If you screw it up, don't worry - the IRS really doesn't understand this
either. I've had audits where the item was an issue and some ended up as:
"What's this?" "Turn to Section 691 in the IRC." "Oh." (issue done).
Office audit especially doesn't even know where to start in doing the
computation. I've had other audits where they've disallowed it because they
don't understand it at all, just for me to get it back in appeals. The last
time, the case was already docketed, and IRS district counsel (I guess
they're called "local counsel" now) actually referred it to an estate and
gift revenue agent group (usually GS-13's), and 3 weeks later they suggested
that DC concede the issue as correct.
Lastly, note: Some states don't allow the ETD deduction - or substitute the
state inheritance tax amount for the federal amount.
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