I know the IRD deduction only applies to federal estate taxes paid, but it seems like double taxation and that I should be able to deduct and lower the "taxable amount". If I paid a 4.5% tax to PA on the IRA and I take out $150,000 this year shouldn't I be able to adjust the amount in box 2 to $143,250 (as the value is that after the taxes I already paid on it)?
No, you will not be permitted to reduce the taxable amount on your 1099R. As far as deducting the inheritance tax paid, if you are over 59 1/2, you are subject to the inheritance tax if the inherited IRA is a traditional IRA. If it is a Roth IRA, you are subject to the inheritance tax regardless of age. These are not tax deductible on the federal or state level.
Not sure I understand your reply. I am NOT over 59.5 but the age should make no difference. I talked to a few accountant and they said double taxation should definitely not happen. They said the cost basis is what needs to be adjusted. It is similar to receiving an IRA with after tax contributions. A step down basis needs to be calculated.
@DaveF1006 is correct. These are not deductible taxes. As far as Pennsylvania is concerned that was their share of the inheritance and the remaining 95.5% is yours. If you alter the 1099_R amounts the IRS will reach out to you with questions.