Too late to claim basis for inherited traditional IRA?

[frankharry]

My father died in 2020.  He had several traditional IRA accounts with a significant tax basis.  He last took an rmd in 2019 and filed 8606 forms in 2019 and preceding years showing the basis.  There was no rmd in 2020, so there is no 8606 form with his 2020 taxes.  My sister and I inherited these IRA accounts 50/50 and started taking distributions in 2021.  We'll be taking everything out over a 10 year period.  I had forgotten there was a basis and treated the distributions as 100% taxable for 2021 and following for my own taxes so far.

Can I still claim the basis going forward, since there are 8606 forms filed with my father's taxes showing the basis amount?  I assume the basis is still the same as at time of death (50% of the total basis for me) since I am unable to make any further contributions to his IRA.  Could I go back and file amended forms for several of the past few years to claim the basis?  I believe the limit is three years, so would 2023 be the earliest that qualifies?  In any case it seems I should be able to claim the basis going forward.

Any information would be appreciated.

[Opus 17]

@dmertz 

@frankharry , I don't think Turbotax handles this situation well.  You will have to do a lot of calculations on your own.  To know where you are for 2025, you would have to prepare form 8606 for each year that you took a withdrawal, updating as you go.  The basis is not going to be fixed, since it also depends on investment gains or losses, and all withdrawals follow the pro rata rule.

Suppose the initial balance of your inherited IRA was $100,000 with a $50,000 basis.  You withdrew $10,000 in 2021.  Your new basis would be $45,000.  Now suppose that during 2022 the account value grew from $90,000 back to $100,000.  You withdraw another $10,000.  That means that your 2022 withdrawal is 45% basis, or $4,500, and $5,500 is taxable.  Now your basis for January 1, 2023 is $40,500.  You continue this calculation forward.

Every withdrawal you made from 2021–2024 reduced the dollar value of the basis, and the percentage will fluctuate every year based on investment gains and losses.  The only way the basis would remain the same percentage is if the money was placed in a cash account that pays zero percent interest.

If you want to claim a basis on your 2025 return, you will have to perform the calculation for every year from 2021 to 2025 to get that basis.  You also would be able to file amended returns going back 3 years to adjust the taxable amount and claim a refund of the difference in tax.  (2022 can be amended as long as you file before April 15, 2026.  You have more time to amend 2023 and 2024, it is too late to amend 2021.)

What I can't tell you is how to report that non-taxable basis for an inherited IRA in Turbotax because I'm not sure the program handles that situation.  I will ask an expert @dmertz to explain further. 

[fanfare]

For an inherited IRA with basis, the names on 8606 should be "<owner> and <your name> BENE" or Beneficiary if it fits, and your SSN.

TurboTax won't let you enter that name,

You'll have to file on paper anyway so get the form in fillable PDF from IRS

TurboTax will calculate the taxable part if you pretend the IRA is your own IRA with basis 

OR

Just leave prior years and start with the original basis on 2025  tax return.

You still have the 8606 name: issue.

reply back if you want a workaround for that.

@frankharry 

[Opus 17]

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@fanfare wrote:

OR

Just leave prior years and start with the original basis on 2025  tax return.

You still have the 8606 name: issue.

reply back if you want a workaround for that.

@frankharry 

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I am open to being corrected, but if the taxpayer has been making withdrawals since 2021, they can't use the 2019 basis in 2025.  They have to account for the intervening years even if they didn't claim the exclusion.  

[frankharry]

Thanks, @fanfare, that was my original plan.  It seems the basis will not change since my father died since no credit has been claimed against the basis yet.  The basis only changes when making new contributions or when making distributions and using part of the basis to lower the tax.  Since I have done neither, it seems the basis should be unchanged and I should be able to use it going forward.

I'd like to hear about the workaround for the 8606 name:issue.  Thanks.

[dmertz · Accepted solution]

You would need to refigure the taxable and nontaxable amounts of each of the distributions taken as beneficiaries, carrying forward the remaining basis after each.  It's too late to claim a refund of the excess tax paid for 2021, but there is still time to amend the 2022, 2023 and 2024 tax returns to claim refunds.

As fanfare mentioned, you would complete Forms 8606 outside of TurboTax to calculate the nontaxable and taxable amounts, and the amount of basis that carries forward each year.

And to be clear, the present basis is not what was carried forward from 2020.  The basis applied proportionately to each of the distributions that were made to beneficiaries whether claimed correctly or not.  That's why you need to prepare 2021, 2022, 2023 and 2024 Forms 8606 to determine the amount of basis that carried into 2025.  You are not permitted to pick and choose which years to apply basis.  It must be factored into determining the nontaxable and taxable amounts of every distribution.

[fanfare]

You must use a separate Form 8606 calculation to determine the taxable portion using the basis in the inherited IRA.
The problem is the software won't enter the correct Name:
And it won't handle the case where you too have a basis in your IRA and took a distribution.
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you can calculate the taxed portion on Form 8606 yourself to discover the proper amount for 1099-R box 2a.
you can start a separate tax return in desktop TurboTax and use that one to calculate the Inherited IRA taxed portion.
Then you have to fudge up a 1099-R that produces those amounts on Form 1040 avoiding Form 8606.
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After verifying you have the correct taxable amount on Line 4b
E-file your return, don't file on paper.

After it is ACCEPTED ,
get Form 1040-X from IRS website and mail it in with your 8606, which you can also get in fillable PDF.
Note: since you are not changing any dollar amounts on your amended tax return, you can leave all the lines 1-23 EMPTY.
The names on 8606 should be "<owner> and <your name> BENE" or Beneficiary if it fits, and your SSN.

Part II explanation: "didn't include Form 8606 with e-File, software issue".
You will have to mail it so this does not use up your one 1040-X e-File.

Do not attach your old 1040 nor your revised 1040 because they are identical.

@frankharry 

[frankharry]

So it seems that I cannot use the existing unused basis from 2019 for 2025, and instead I need to do the calculations as if I correctly filed and claimed the basis each year, then use the new basis obtained this way for this year's taxes?  I understand I can file amended returns for 2022 - 2024 and at least get back those amounts.

It's a shame Turbotax doesn't handle this properly, as I'm sure the program never asked me about a possible basis in the inherited IRA when I did the taxes for 2021 - 2024.  It looks like being double-taxed on the basis in inherited IRAs could be a fairly common situation.  @fanfare thanks for the detailed work-around.  I'll have to decide if it's worth the effort to do that.

[dmertz]

"So it seems that I cannot use the existing unused basis from 2019 for 2025, and instead I need to do the calculations as if I correctly filed and claimed the basis each year, then use the new basis obtained this way for this year's taxes?"

Correct.  A portion of basis was distributed each time even if it was not reported it correctly on Form 8606.

Each combination of decedent and beneficiary must be tracked separately.  The issue with TurboTax trying to track basis in inherited IRAs is that there can be an unlimited number of such combinations even though it would be uncommon to have more than two.  Tracking basis by IRA account doesn't work because of the aggregation rules.  TurboTax has a mechanism for tracking only the basis of Taxpayer and Spouse, part of the IRA Information Worksheet.  I'm not saying that tracking basis for each combination of decedent and beneficiary couldn't be done, but it would not be straightforward to implement.

[fanfare]

TurboTax desktop supports multiple tax files; you can have one for each of your IRAs with basis history.

Then combine for the final 1040 Line 4 as described above.

In any case IRS expects all Forms 8606 to be retained in your files forever.

[frankharry]

@fanfare, thanks for the workaround.  I just went through it in detail, and it looks like it will work.  I should still be able to efile, and just need to send a short 1040-X with the new 8606 form in the mail.  If I could mark more than one answer as correct, I'd mark yours as well.