Inherited Spousal IRA with Non-Deductible Contributions

[lshel]

My wife passed in June 2021, so this is the first income tax season since her passing. Her IRA was transferred to me following her death. Her IRA included non-deductible contributions. How do I use her non-deductible contributions to reduce the basis of what is now my IRA, this year and in following years? I'm using TT Basic on my desktop.

When I input the value of the IRA, TT applied my N-D Contributions against the inherited IRA but did not apply her N-D Contributions anywhere. Also, TT did not apply my N-D Contributions against my previously owned IRA. Should I be treating my inherited IRA as her IRA in TT?

[KrisD15]

Sorry to hear of your loss. 

You can elect to be treated as the owner, or as the account beneficiary.

The non-deductible contributions (both yours and hers as a total)  can be allocated to either IRA if you are treating both IRA's as your own. 

To clarify

Are you filing Married Filing Jointly for 2021? 

Did / Do you need to take an RMD for your late wife for 2021? 

Are you reporting all IRA accounts as your own in the TurboTax program? 

[fanfare]

Since you elected to treat it as your own (assuming the custodian retitled it), that basis is now added to your prior basis.

Whose SSN is on the 1099-R ?

[jtax]

Sorry for your loss.

It does sound like the IRA is now in your name. That's fine.

You could also titled it as an inherited IRA. In that case the name on the account would be something like John Doe beneficiary Jane Doe. Or the word inherited might be there.

If it is not titled as inherited (i.e. is only in your name) then do NOT tell TT that it was an inherited account because inheriting from a spouse is special. You can consider it yours and not inherited. 

Look at your joint 2020 return for Form 8606. There should be one with your wife's name/SSN at the top. Line 14 will tell you what her non-deductible "basis" is that carried forward to 2021. Each year when there is a distribution from the IRA some of that basis is used up. That is calculated on form 8606.

If the 1099-R for 2021 was in your wife's name/SSN, then report it on your joint 2021 1040 as hers. She will have a form 8606 generated.

If the 1099-R is not in her name or for future years, add the non-deductible basis to your non-deductible basis and tell TT about it when asked. In future year's the 8606 will be in your name/SSN and will include both your basis and your wife's because from now on it will all be considered yours.

if you left the IRA as an inherited IRA, it is separate from yours. In that case you will have a form 8606 that is not in your name (it's not your personal IRA). Rather the name on the 8606 will be "John Doe bene Jane Doe" or similar. Unless something has changed this year, that is unfortunate because TT does not support efiling 8606s for inherited IRAs (unless it was from your spouse and you rolled it over into your name only).

Each year I find it a good idea to be sure the 8606 is correct and the carryforward worked correctly. I recently discovered that somehow my basis had not been carried forward one year and I had to correct it.

If this doesn't make sense, please ask again and I'll try to explain.

This is the interview screen for the basis question for inherited IRAs. The regular IRA interview should be very similar.

[lshel]

Many thanks to the three of you who replied, @KrisD15, @fanfare and @jtax. I found helpful information in all three replies. I haven't tried making any changes to my TT yet, and I'm trying to digest all the good info you provided. Let me ask for a few more clarifications.

@KrisD15, you asked:

Are you filing Married Filing Jointly for 2021? 

Did / Do you need to take an RMD for your late wife for 2021? 

Are you reporting all IRA accounts as your own in the TurboTax program? 

Yes, I am filing Married, Filing Jointly for 2021. Yes, the Financial Institution maintaining the IRA sent the 2021 RMD to me, using my SSN and using code 7 on the 1099-R for the distribution. Yes, I have identified both my original IRA and her IRA as my IRA's on TT.

@fanfare, you asked:

Whose SSN is on the 1099-R ?

My SSN is on the 1099-R. And you said:

Since you elected to treat it as your own (assuming the custodian retitled it), that basis is now added to your prior basis.

Since I now have two separate IRA's, I thought I needed to keep them separate and retain the respective Basis for each IRA.

@jtax, you said:

If it is not titled as inherited (i.e. is only in your name) then do NOT tell TT that it was an inherited account because inheriting from a spouse is special. You can consider it yours and not inherited. 

It is not titled as inherited, but I did tell TT it was inherited, because  didn't know better. I will change that when I redo the 1099-R's in TT.

Further, you said:

Look at your joint 2020 return for Form 8606. There should be one with your wife's name/SSN at the top. Line 14 will tell you what her non-deductible "basis" is that carried forward to 2021

Yes, I have the 8606 from 2020, and it clearly shows the remaining Basis for both IRA's.

And, you said:

If the 1099-R is not in her name or for future years, add the non-deductible basis to your non-deductible basis and tell TT about it when asked. In future year's the 8606 will be in your name/SSN and will include both your basis and your wife's because from now on it will all be considered yours.

How do I add the amounts shown as remaining Basis in last year's 8606. I expected TT to do that automatically, but it didn't (perhaps because I told TT that it was an inherited IRA).

 Also, please clarify what you meant by "and tell TT about it when asked." Tell TT about what?

Okay, I think I've provided additional specificity to my situation. If you'll be so kind, please provide additional input to help me go forward. Thanks.

[jtax]

@lshel thank you very much for your super-organized and cogent replies and questions. 

@jtax, you said:

How do I add the amounts shown as remaining Basis in last year's 8606. I expected TT to do that automatically, but it didn't (perhaps because I told TT that it was an inherited IRA).

 Also, please clarify what you meant by "and tell TT about it when asked." Tell TT about what?

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Yes, telling TT it was inherited could be the issue.  I don't think TT knows enough to "move" your wife's basis to your IRA. TT does ask if you inherited the IRA from your spouse, but if you answer that yes it doesn't seem to do anything with your spouse's 8606 basis. I'm not sure what else it does if you answer that yes.

What I might suggest is to answer no to the inherited question. I think that is okay because it is now your IRA. There are special rules for inherited IRA's that do not apply to spouses who roll it over in their own name.

Below is the screen show flow to get you to where you enter your wife's basis. (Actually add it to your own. I'm guessing your own is zero.) If you get to the last page shown below and enter your basis, it should show up on your 8606 and you should see the calcs in 8606 part one reducing the taxable amount of the distribution (line 13 subtracted the total distributions amounts). 

You may also have a 8606 for your wife in the final return. If you are adept at forms mode you could remove it. But I wouldn't worry about it as long as there no 1099-R's in your wife's name/SSN in 2021 because it won't do anything and shouldn't carry forward to next year when you won't be filing a joint return. Just don't be confused next year and double your basis. TT should track your basis from your 8606 line 14 of the prior year. If it does so it will fill in the amount on the last screen below. You can always correct it if it is missing or wrong so always be on the lookout for that not happening and in that case you can type in the prior year 8606 line 14 yourself. (Or if you use a tax-preparer or something else.)

If that doesn't make sense, please ask again. Thank you for your patience. 

[fanfare]

TurboTax can't handle the situation where both your inherited IRA and your IRA have a basis.

BUT 

if you elected, or will elect, to have the IRA treated as your own ,

then just update your prior basis in TurboTax history.

[jtax]

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@fanfare wrote:

TurboTax can't handle the situation where both your inherited IRA and your IRA have a basis.

---

@fanfare TT can't even deal with just an (non-spousal) inherited IRA with basis even if your own IRA doesn't have basis. Well, you can manually enter the taxable amount and manually fill out an 8606 and paper file, but that isn't really supporting the case.

[fanfare]

@jtax 

agreed, 

BUT

 if you elect to have the IRA treated as your own , it is no longer an inherited IRA.

[fanfare]

I posted a couple weeks ago a workaround for this tax software deficiency - it's not only TurboTax - that allows you to e-File.

But I won't repeat myself here.

[jtax]

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@fanfare wrote:

I posted a couple weeks ago a workaround for this tax software deficiency - it's not only TurboTax - that allows you to e-File.

But I won't repeat myself here.

---

@fanfare could you post a link here to that discussion. thanks.

[macuser_22]

If you choose to threat the Inherited IRA as your own and it is now in your name then the IRA is no longer inherited - it is YOUR IRA.   Any basis that existed in the inherited IRA is simply added to your basis.    When you enter the 1099-R and the question asks for your basis you  simply adjust  your basis to include  the basis in the inherited IRA to your basis.   Not complicated at all.

The fact that you have 2 1099-R's from different accounts is irreverent.   For tax purposed you only have one IRA that is the total of all IRA accounts you have.   After you have entered both 1099-R's the basis questions comes yo and the basis applied to the total IRA distribution regardless of the number of 1099-R's.

[fanfare]

@jtax 

https://ttlc.intuit.com/community/retirement/discussion/re-form-8606/01/2544248#M168147

scroll back.

[lshel]

@jtax  I really appreciate all your good, clear information. I also picked up lots of bits of information from all the other contributors which I appreciate. 

@jtax,I have competed and submitted my return. There's no way I'd be done by now without your help. I would like to add that as I redid the IRA income section today, I clicked on the Easy Guide button and it did (sort of) guide me through the instructions on increasing my Basis. It updated my 8606 by adding my Spouse's Basis to my Basis and the Easy Guide generated an explanatory attachment for submittal with my return. Now, if TT would just include that in the regular Step By Step Guide , that would be a huge improvement. But without your help, I'm not sure I could have completed the Easy Guide correctly. TT needs to add clarification regarding not calling an inherited IRA an inherited IRA if the account is titled in the taxpayer's name. Thanks for your help. You saved me a ton of time and I appreciate it.