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phonig
New Member

My son, dependent on my return, received $12,000 distribution from an inherited IRA. Another $1000 in W2 income. Form 8615 computes a tax of 20% of AGI. Seems high?

Total taxable income is 11,650 after the standard deduction.  Tax is 2277, 19.5%.  Why isn't the tax liability computed using the marginal tax rates of 10% and 12%?

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Accepted Solutions
dmertz
Level 15

My son, dependent on my return, received $12,000 distribution from an inherited IRA. Another $1000 in W2 income. Form 8615 computes a tax of 20% of AGI. Seems high?

Unlike past years when the kiddie tax calculated on Form 8615 was based on the parent's income tax rate, for 2018 and beyond the Tax Cuts and Jobs Act of 2017 now makes the taxable amount taxed at trust tax rates, so the taxes work out to $2,277 as you indicated.

In light of this tax change, people need to be reconsidering their beneficiaries if their current beneficiaries are dependents.

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3 Replies
dmertz
Level 15

My son, dependent on my return, received $12,000 distribution from an inherited IRA. Another $1000 in W2 income. Form 8615 computes a tax of 20% of AGI. Seems high?

Unlike past years when the kiddie tax calculated on Form 8615 was based on the parent's income tax rate, for 2018 and beyond the Tax Cuts and Jobs Act of 2017 now makes the taxable amount taxed at trust tax rates, so the taxes work out to $2,277 as you indicated.

In light of this tax change, people need to be reconsidering their beneficiaries if their current beneficiaries are dependents.

KrisD
Intuit Alumni

My son, dependent on my return, received $12,000 distribution from an inherited IRA. Another $1000 in W2 income. Form 8615 computes a tax of 20% of AGI. Seems high?

It depends on how he took the inherited IRA, as one payment or as a new inherited IRA account. 


"Many people think they can roll an inherited IRA into their own IRA. Unfortunately, if you inherited an IRA from someone who is not your spouse you cannot roll the account into your own IRA or treat the IRA as your own. Instead, you must choose from the options outlined below.

Cash in the IRA Now - Or Within 5 Years

You always have the option of cashing in an inherited IRA. You will pay taxes on the amount of the distribution, but no 10% IRA early withdrawal penalty tax. If you choose this option you must cash in the entire inherited IRA by December 31st of the fifth year following the original IRA owner’s death. Although no penalty tax applies, this may not be your best option. Cashing in a large IRA could mean anywhere from 25% – 39.6% of it goes right to federal taxes. State income taxes will apply too. For this reason, you may want to consider option 2 below.

Stretch Out Your Withdrawals

To take withdrawals out slowly, you can set up what is called an “Inherited IRA” account with you as the beneficiary. As a beneficiary, you must take minimum distribution amounts from the inherited IRA each year according to your life expectancy using a specific set of rules. These distributions are called Required Minimum Distributions and are frequently referred to as RMDs. This option of taking withdrawals over your life expectancy is frequently referred to as a “Stretch IRA”. The nice thing about this option is that you can always withdraw the money faster if needed."


 https://www.thebalance.com/inherited-ira-from-a-non-spouse-2388707


dmertz
Level 15

My son, dependent on my return, received $12,000 distribution from an inherited IRA. Another $1000 in W2 income. Form 8615 computes a tax of 20% of AGI. Seems high?

Unfortunately, with the money already distributed there is no longer an option to do anything but pay the taxes.
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