TT2019 Incorrectly showing RMD from inherited Spouse IRA as Not Taxable (Rollover)

[BenH]

So I may be doing something wrong, or not understanding the questions, presented in the step-by-step but it seems like TT2019 is not properly handling this scenario.

I am preparing my Mother's taxes for 2019, a year in which her spouse died in February.  They were both over 70.5 in 2019. She transferred several IRAs of which she was beneficiary of into her IRA account after his death (in 2019).  He had not taken any RMDs yet for 2019, and so my understanding is she is required to take them for 2019.

If I answer the questions correctly as asked by the step-by-step it appears to show the RMDs as non-taxable (they aren't).  I can then modify the underlying form to get what I believe is the correct information, but I'm not sure it is correct as I don't think I should have to manipulate it manually in this scenario.  Here are the details:

In TT2019, the step-by-step is as follows:

1) State who 1099-R belongs to.  In this case, it belongs to MOM since the IRA has been in her name since since spouse's death.

2) Enter 1099-R info as found on 1099-R form.  This includes Gross Distribution (RMD), Taxable amount, and any Federal Tax withheld.  Also, the distribution code which, based on our forms is a Normal Distribution (7).

3) Report who distribution is from - which in this case is "none of the above" (standard RMD from IRA).

Now this is where things get hairy....

4) Asks if IRA was inherited.  The answer here should be YES, since MOM inherited from SPOUSE in 2019.  Enter Yes, Spouse name and year of death (2019)

5) Asks if funds were transferred into MOM's own IRA account.  Answer should be yes, as MOM rolled over this IRA to her own.

6) "Total Rollover" step.  Reiterates the Distribution amount as well as the federal withholding.  Then asks the following question:

"Did MOM deposit $(Federal Withholding Amount) from your own funds in addition to the $(Total distribution amount minus the withheld amount) received from the distribution?"

So for example if RMD was $2,000 and $400 was withheld, question reads:

"Did MOM deposit $400  from your own funds in addition to the $1600 received from the distribution?"

This questions makes no sense to me on several levels:

1) Why would MOM deposit $400 which was with held for taxes (not sure this is relevant, but I don't understand it).

2) Who is "your" ?  Does it mean did MOM deposit money from "their own funds"?  Seems the wrong pronoun is used here and it complicates the matter.

Since the question makes no sense I have to wager a yes or no answer.  Answering no does not seem correct because then I am presented with a question asking how much was rolled over.  The truth is the whole amount was rolled over, so entering any portion thereof seems incorrect.  Therefore, I answer "Yes" since it is the only way to have the 1099-R reflect the full amount.

Doing this completes the form but causes the distribution to be non-taxable since the 1099-R section for Inherited IRA  (1099 in Forms View) checked off the first box  stating:

"Treat as recipient's own (this is treated as a rollover)"

It seems that the proper thing to do would be to check off the second option:

"Recipient, but was originally inherited from a spouse (treated as recipient's IRA)"

If I choose this option, the amount becomes taxable (as it should be).

If I then toggle back from directly editing the form to step-by-step and walk through again it seems the way to properly get this entered is on step #5 (above), when it asks is MOM put the inherited funds into her own account, is to not answer the question at all.  That is, do not check off the option that MOM put the money in her own account in 2019, nor to check off the box that she didn't put it into her account.  I'm not sure why the interface would let you proceed without selecting either (since they seem mutually exclusive), but it does.

If you do this it asks a question about the birth date of deceased spouse, then some final questions about the RMD designations (HSA, etc).

I'm just really confused as to how the step by step is asking the questions because it doesn't seem like you can arrive at the correct completed form if you answer the questions as asked properly.  I also need to confirm that I am filling out the actual 1099-R form correct in her circumstance.

Thanks

[fanfare]

4) Asks if IRA was inherited.  The answer here should be YES, since MOM inherited from SPOUSE in 2019.  Enter Yes, Spouse name and year of death (2019)

5) Asks if funds were transferred into MOM's own IRA account.  Answer should be yes, as MOM rolled over this IRA to her own.

These are mutually exclusive and can't both be YES.

If spouse elected to treat it as her own and put it into her own IRA, it is no longer inherited.

[fanfare]

sorry I wasn't going to post the above since I think it is incorrect but it  got submitted.

[fanfare]

from your funds, should read, from her funds.

This would be a make up deposit for tax unnecessarily withheld from a rollover.

[dmertz]

"4) Asks if IRA was inherited.  The answer here should be YES, since MOM inherited from SPOUSE in 2019.  Enter Yes, Spouse name and year of death (2019)

5) Asks if funds were transferred into MOM's own IRA account.  Answer should be yes, as MOM rolled over this IRA to her own."

This is where you are making the error; the answers to both of these should be No.  The question is actually asking what was done with the distribution reported on this particular Form 1099-R, not how the funds came to be in your mother's IRA.  Presumably this distribution was not rolled over (at least not the RMD which was ineligible for rollover).  TurboTax's wording in this area is extremely confusing; code 7 indicates that the distribution was from her own IRA, not from an inherited IRA.

It's likely that the funds were moved from her spouse's IRA by non-reportable trustee-to-trustee transfer.  It would only have been a distribution and rollover if your mother also received a separate code 4 Form 1099-R.

[BenH]

"This is where you are making the error; the answers to both of these should be No.  The question is actually asking what was done with the distribution reported on this particular Form 1099-R, not how the funds came to be in your mother's IRA.  Presumably this distribution was not rolled over (at least not the RMD which was ineligible for rollover).  TurboTax's wording in this area is extremely confusing; code 7 indicates that the distribution was from her own IRA, not from an inherited IRA."

"It's likely that the funds were moved from her spouse's IRA by non-reportable trustee-to-trustee transfer.  It would only have been a distribution and rollover if your mother also received a separate code 4 Form 1099-R."

Ok.  But the wording is literally:

"Did MOM inherit the IRA from INSTITUTION NAME."

It doesn't seem there is any ambiguity in the question, therefore it feels more like Intuit is making the error, and not me :).   But, I suspect you are correct that their wording is not just confusing...but outright incorrect in this matter.

This was a direct transfer.  When we did it we filled out the form for the Spouse option for rollover to a new IRA established in MOM's name and not the option to create a beneficiary IRA.  She did not receive any additional 1099-R with code 4.

The one possible point of issue may be that the RMD was not taken by MOM until after the account had been moved into her name.  AFAIK she would not have been able to take it directly from her deceased spouse's account (since account not in her name).  And, since she was named beneficiary the account did not need to pass through the estate at all.  Therefore the RMD was taken after it was put into her name.  I hope this shouldn't be an issue (as I don't know how else we would have done it and none of the 3 institutions we transferred IRAs from told us otherwise about taking an RMD prior to transfer).

This all being said, I am right in assuming that the proper way to do this is so that the completed 1099-R form shows the second checked option ""Recipient, but was originally inherited from a spouse (treated as recipient's IRA)"

Thanks very much.

[BenH]

"4) Asks if IRA was inherited.  The answer here should be YES, since MOM inherited from SPOUSE in 2019.  Enter Yes, Spouse name and year of death (2019)

5) Asks if funds were transferred into MOM's own IRA account.  Answer should be yes, as MOM rolled over this IRA to her own."

This is where you are making the error; the answers to both of these should be No.  The question is actually asking what was done with the distribution reported on this particular Form 1099-R, not how the funds came to be in your mother's IRA"

Also, just to clarify here if I answer NO to it not being inherited then at no point elsewhere do I need to report this was inherited?  IOW, it is not actually considered an inherited IRA because it was not rolled over to a beneficiary IRA, but directly into a new IRA for the spouse (MOM)?

[dmertz · Accepted solution]

The money now in your mother's IRA is no longer treated as an inherited IRA, it's treated as if it has always been hers.  Trustee-to-trustee transfer of her spouse's IRA to her IRA is not a reportable transaction, it is neither a distribution nor a rollover.  It would only be a reportable distribution and rollover if a code 4 From 1099-R was issued that shows a distribution from the inherited IRA.