Is there a workaround to avoid inherited deferred comp income as AGI and Earned Income?

[Bookkeeper15]

I received a 1099-R form for an inherited deferred Comp plan.

I was told this amount goes into my 1040-SR on line 5a and 5b, since the amount was taxable (the tax was taken out when they paid me).

However, when I entered the deferred comp on 5b, this causes my AGI (line 11) to go from 5000 to 27000. So now my AGI (line 11) is a lot higher and I'm longer low income. Plus, I don't qualify for the EIC (line 27). I would have to make about 21000 or under for my filing status to qualify.

It's frustrating that my inherited deferred comp is not Earned Income and yet it effects my earned income.

It bother's me a little bit that I don't get my EIC, but what bothers me the most is that my AGI is so high.

Is there a work around so that my AGI is not so high?

[macuser_22]

If inherited then *you* did not earn it so it is probably  taxable as ordinary income to you.

What code is on box 7?

What is in box 2a?

[AmyC]

Income for taxes, yes. Income for EIC, maybe. If it meets the rules below, then your income goes below zero and you don't qualify for EIC. The EIC chart shows $384 for $5,000 income for MFJ with no kids. No EIC for no income.

Chart page 31, Publication 596, Earned Income Credit:

Wages. Earned income includes the amount from line 1, Form 1040, reduced by:

•Scholarship or fellowship grants not reported on Form W-2.

•Amounts received for work performed while an inmate in a penal institution.

•Amount received as a pension or annuity from a nonqualified deferred compensation plan or a nongovernmental IRC section 457 plan

[Bookkeeper15]

Hopefully this clarifies a few things:

*I've rounded the amounts to make it easier

Line 1 -  I do not have any Wages, salaries, tips, W-2. I am Self-Employed. (0)

Line 5a & 5b - Inherited Deferred Comp Gross Distribution & matching taxable amount (1099-R line 1 & 2a being the same) (22,000)

Line 8 - My Self-Employment income from schedule 1 line 9 (5700)

Line 9 - Total of line 8 & line 5b (27,700)

Line 10a - Adj to income-Sch.1 line 22 (-400)

Line 10b - Adj to income-Charitable Contr. (-300)

Line 11 - Adjusted Gross Income (27,000)

Line 12 - Standard Deduction (26,100)

Line 15 - Taxable Income (900)

Line 16 - Tax (100)

Line 23 Self-Employment Tax from Sch.2 (800)

Line 24 Total Tax (900)

Line 25b - Federal Income Tax withheld (-4400)

Line 26 - Estimated Tax Payment (-800)

Line 27 - Earned Income Tax Credit based on AGI (0)

Line 33 - Total Payments (5200

My AGI is 27,000.

My EIC is 0

I understand that I had to pay the Federal tax on the Gross Distribution. But it's not like it was MY deferred comp account; It was inherited. I feel that this is affecting my taxes in a way that should/can be avoided with perhaps a workaround.

I feel like my AGI should not include the deferred comp inherited income. In other words, Inherited income shouldn't show up on my AGI.

Also, I feel like I should qualify for the EIC based on my actual Earned Income and not on the AGI which includes inherited income. If I had not inherited the 22000, my earned income of 5000 (5700-700 Adjustments) would have qualified me.

There must be some workaround!!!

Thank you!

[macuser_22]

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@Bookkeeper15 wrote:

Hopefully this clarifies a few things:

Line 5a & 5b - Inherited Deferred Comp Gross Distribution & matching taxable amount (1099-R line 1 & 2a being the same) (22,000)

I understand that I had to pay the Federal tax on the Gross Distribution. But it's not like it was MY deferred comp account; It was inherited. I feel that this is affecting my taxes in a way that should/can be avoided with perhaps a workaround.

I feel like my AGI should not include the deferred comp inherited income. In other words, Inherited income shouldn't show up on my AGI.

Also, I feel like I should qualify for the EIC based on my actual Earned Income and not on the AGI which includes inherited income. If I had not inherited the 22000, my earned income of 5000 (5700-700 Adjustments) would have qualified me.

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Because is is NOT YOUR deferred comp.    You cannot inherit deferred comp and treat it as of it was yours - it is not.

Why would you think  inherited money would not be taxable and add to your AGI?    - It will.   There is no way for it not to.

[macuser_22]

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@AmyC wrote:

Income for taxes, yes. Income for EIC, maybe. If it meets the rules below, then your income goes below zero and you don't qualify for EIC. The EIC chart shows $384 for $5,000 income for MFJ with no kids. No EIC for no income.

Chart page 31, Publication 596, Earned Income Credit:

Wages. Earned income includes the amount from line 1, Form 1040, reduced by:

•Scholarship or fellowship grants not reported on Form W-2.

•Amounts received for work performed while an inmate in a penal institution.

•Amount received as a pension or annuity from a nonqualified deferred compensation plan or a nongovernmental IRC section 457 plan

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@AmyC the poster said it was inherited. 

[Bookkeeper15]

macuser_22  "Because is is NOT YOUR deferred comp. You cannot inherit deferred comp and treat it as of it was yours - it is not."

That is why I said, "It's not like it was MY deferred comp account; It was inherited." That was my point exactly, that it is NOT MY deferred comp. If it was, then it would make sense that it should be part of my AGI.

macuser_22 "Why would you think inherited money would not be taxable and add to your AGI?    - It will.   There is no way for it not to."

When I stated that "I understand that I had to pay the Federal tax," that meant that I understood that I had to pay federal tax.

Inherited income btw is not typically taxed. The only reason this is being taxed is because it is a deferred comp, never having been taxed. I received other parts of my inheritance that do not show up on my taxes at all.

In summary, I feel that I owed the tax, but like the rest of my inheritance, it shouldn't show up on my AGI

I don't feel like my question is being addressed on this platform. I will take it to a CPA.

Thank you all for your time.

[macuser_22]

Inherited income on a 1099-R IS taxable and ALL taxable income adds to your AGI.   Taxable 1099-R income goes on line 5b of the 1040 form and is added to AGI.    No way around it.

[dmertz]

It's the increase in your AGI resulting from the taxable deferred income that that is causing you to lose the EIC.  As macuser_22 said, nothing that can be done to avoid this addition to AGI.  Deferred compensation is not treatable as earned income (even if it was paid to the participant).