I have a feeling, from reading @dmertz replies to other related questions, that it is the estate that pays the taxes and that the payments to me from the estate are not taxable because it is an inheritance?
I assumed I needed to report the income and include a K-1 issued by the trust.
I have been trying to figure out what line on the K-1 form to report the income for the Trust to give me.
My brother (the fiduciary) sent me the Required Min Distribution from mom's IRA. We didn't have to deal with this the year she died because it was 2020 and there was no RMD that year for anyone. But now I'm having to figure this out.
He sent me a check from the IRA in 2021.
Thank you for guidance. I do have the business level of TurboTax.
@Leaminda - if you received a K-1 and enter it into Turbo Tax, Turbo Tax will figure that out for you.
If you look at the IRS version of the K-1 , it explains each line item on the K-1 and where that is mapped to on Form 1040. read the 2nd page of the link below:
https://www.irs.gov/pub/irs-pdf/f1041sk1.pdf
are you the beneficiary of the IRA or is the Trust the beneficiary of the IRA. If the latter it could be that the Trust reported the income and paid the tax; you may not see it on the K-1 - so I kinda agree with what you are thinking.
Did the administrator of the Trust provide you with the K-1?
If a trust and not your mother's estate was the beneficiary of the IRA, your mother's estate is not involved. Since your brother as trustee of the trust, not the IRA custodian, sent you an amount equal to the RMD, it seems that the trust, not you, is the beneficiary of the IRA. Regardless, as NCperson said, enter the Schedule K-1 (Form 1041) as received. It's likely that box 5 shows the taxable amount of the RMD distribution (likely your entire RMD) which passes the tax liability for that through to you. TurboTax will include this amount on Schedule 1 line 5 and Form 1040 line 8 as income on your tax return.
If the Schedule K-1 shows an end date in 2021, this goes on your 2021 tax return. If it shows an end date in 2022, it goes on your 2022 tax return instead.
Thank you for your replies.
I did not receive a K-1. I think my brother is supposed to create it and send it to IRS and myself that but didn't and I am trying to get that done. And, I was confused as to which box to fill in the RMD amount. DMertz said box 5 and that does look right.
Should I pay the tax or the estate?
I inherited the IRA and my brother is in charge of it. It has to take a taxable RDM every year and be fully out of the IRA within 10 of her death.
It is being privately held at a major brokerage, but I did not receive any tax forms.
@Leaminda - you really need to wait on the K-1; it is the Trustee's responsibility to create it and send it to the IRS and you. I wouldn't guess on what goes on it; it has to tie to the K-1 that the Trust generates.
For example, that RMD, were the taxes already withheld by the brokerage (which is typical) which would affect how the RMD, which is income, and the credit for the taxes paid would reflect on the K-1. Could be that the RMD doesn't belong on the K-1 and what you received net of the taxes already paid. Just a lot of mysteries created by guessing.
Better to spend the time and affort convincing your brother to complete his fiduciary responsibility and issue the K-1. It was due to you by March 30. Does he have an accountant doing it? that would make it easier.
@Leaminda wrote:I did not receive a K-1. I think my brother is supposed to create it and send it to IRS and myself....
Yes. If the trust is the beneficiary of the IRA, then your brother (as trustee, presumably) is responsible for preparing a Form 1041 for the trust (or ensuring that the return is prepared) and issuing you a K-1.
Thank you. I will ask him to hire someone to take care of it for us.
As an inheritance, if the Estate pays the tax on the RMD then I don't want to also pay tax on it as income. It is an inheritance.
If this is an inheritance, do I pay taxes on it? If the estate is paying the tax?
"I inherited the IRA and my brother is in charge of it."
It seems that you are beneficiary of the trust, and the trust is the beneficiary of the IRA, so it's a bit inaccurate to say that you inherited the IRA.
It's not clear whether this is 2021 income or 2022 income. It depends on whether the trust uses a calendar year, or if it uses a fiscal year and the distribution of the RMD to the trust in 2021 occurred in the fiscal year ending in 2021 or in 2022. If it's 2021 income, the Schedule K-1 is well overdue to you. For example, if the trust uses a fiscal year ending on June 30, a distribution in 2021 after June 30 would be 2022 income to you. You need to sort this out with your brother.
@Leaminda RMD's are the required minimum annual distributions of an IRA.. The IRA is technically outside the will and not an 'inheritance' per se. But most probably, the distributions from an IRA are paid to the Trust, which is repsonsible for the taxes. The money you are receive is probably tax free (subject to what the K-1 states). I just wouldn't use the word 'inheritance'.
Thank you all for your time helping me understand this issue.
I wonder to myself here what the K-1 would state that would delineate that it was not taxable to me.
I have paid in on all the other income I received.
@Leaminda wrote:I wonder to myself here what the K-1 would state that would delineate that it was not taxable to me.
If the income is not taxable to you, then it is likely you will not receive a K-1 (a K-1 is used to report income, gains, deductions, and credits).
If the income is taxable to you (i.e,, it was passed through from the trust or estate (there is clearly some confusion here as to the type of entity)), then the K-1 will have a figure in Box 5 (as @dmertz stated earlier).
Given that this income to the trust was distributed from the trust to you, I don't think that it's plausible that the trust paid the taxes on the RMD. For the trust to pay the taxes I think that the income would have to be retained in the trust and distributed in a subsequent year as a distribution of corpus rather than a distribution of income.
@dmertz wrote:
Given that this income to the trust was distributed from the trust to you, I don't think that it's plausible that the trust paid the taxes on the RMD.
I agree, but how does an "RMD" factor into the equation if, as @Leaminda indicated earlier, the 10-year rule is in force? In that regard, who is making the determination as to how much to distribute?
There are some, as yet, unanswered questions here.
The terms of the trust would probably determine if this income to the trust was required to be distributed to the trust beneficiary, but I believe if it is distributed to the beneficiary (as was the case here), it would be a DNI deduction to the trust and taxable to the beneficiary.
@dmertz wrote:
The terms of the trust would probably determine if this income to the trust was required to be distributed to the trust beneficiary, but I believe if it is distributed to the beneficiary (as was the case here), it would be a DNI deduction to the trust and taxable to the beneficiary.
I agree, 100%.
However, the question remains as to who, exactly, is making the determination as to how much (if any) to distribute if the 10-year rule is applicable.
The trustee of the trust is the one who determines and requests distributions to be made from the IRA to the trust, but that's not really relevant to how the income that is received and distributed is required to be reported. The trustee of the trust has a fiduciary responsibility to request appropriate RMDs, but "appropriate" depends on the circumstances and the reason that the trust was made the beneficiary.
@dmertz wrote:
The trustee of the trust is the one who determines and requests distributions to be made from the IRA to the trust.....
Except there is no way we can be assured that is the case without actually examining the trust instrument. The statement implies that the trustee has the discretion to determine the amount of the distribution (if any at all).
@dmertz wrote:
The trustee of the trust has a fiduciary responsibility to request appropriate RMDs....
That was my other point; if the 10-year rule applies here, then there are no RMDs (at least no annual RMDs, as the entire balance simply needs to be distributed anytime before the end of the 10-year period).
@dmertz wrote:
.....that's not really relevant to how the income that is received and distributed is required to be reported.
Yes, and it appears as if someone is doing something wrong (or there is a misunderstanding) considering the limited facts presented.
<<(at least no annual RMDs, as the entire balance simply needs to be distributed anytime before the end of the 10-year period).>>
as I read through your back and forth with @dmertz , this caught my attention.... I thought that based on the new IRS rules (and I appreciate they are still in draft form and the comment period just ended), that if the IRA owner was subject to RMD, then the "designated" beneficiary has to continue RMDs over the 1st 10 years after the owner's death; the balance must go to zero in the 10th year.
however, if the IRA owner died before RMD's were required, then yes, there is no RMD requirment, but the IRA must be still be liquidated by the end of the 10th year.
here is a good article on the current status and discussion
thoughts?
@NCperson wrote:thoughts?
My thoughts are that I generally know the rules, but do not know essential details other than what @Leaminda mentioned in an earlier post, to wit:
"I inherited the IRA and my brother is in charge of it. It has to take a taxable RDM every year and be fully out of the IRA within 10 of her death."
If the mother died after her Required Beginning Date for RMDs, the regulations proposed 4 months ago require annual distributions based on the single life expectancy of the beneficiary if the trust is qualified for look-through or based on the life expectancy of the mother if not qualified for look-through. However, it was the belief during most of2021 was that annual RMDs would not be required, so it's not clear why this distribution in 2021 is being referred to as an RMD. Assuming that this part of the proposed regulations becomes final without change, it's unclear what the IRS will say about 2021 RMDs not taken because of the belief that no annual RMDs were required whenever the 10-year rule applied.
When I said that the trustee determines the appropriate amount of the distribution, that assumes that the trustee is basing that determination on the terms of the trust. I didn't mean to imply that the trustee necessarily has discretion in determining the amount. I only meant it to imply that it's the responsibility of the trustee to tell the IRA custodian how much to distribute.
There's a good chance that the trust agreement was written before the SECURE Act was enacted, so the trust agreement might not produce the originally intended result given the changes in the law.
@dmertz wrote:
....the belief during most of2021 was that annual RMDs would not be required, so it's not clear why this distribution in 2021 is being referred to as an RMD....
That was (is) one component of my confusion; if the 10-year rule applies then (annual) RMDs are basically irrelevant.
@dmertz wrote:I didn't mean to imply that the trustee necessarily has discretion in determining the amount. I only meant it to imply that it's the responsibility of the trustee to tell the IRA custodian how much to distribute.
Understood.