Inherited IRA Distribution and 300%+ blended tax rate

[SisterHelpingWithTaxes]

• I am helping a relative with their (assumed it would be) simple tax returns. 
• This relative rolled over an inherited IRA in 2024 and I entered the 1099-R as required. 
• Only income is Inherited IRA distribution of ~$17k; financial institution that rolled over the account calculated and sent this amount. This ~$17k is reflected on a separate 1099-R which I entered into TT as required. There were taxes withheld on this of $480 which I also entered. 
• After the standard deduction, the taxable income is $1194. 
  Blended tax rate is shown as 381.5% by TT with Tax Liability of $4,555. 

I had a similar situation on my taxes but did not end up with an outrageous tax rate. 

The TT expert I spoke to yesterday sent me links to a few articles on the subject, but they did not provide any clarity for me.  Have already cleared all entries and re-entered, but received the same shocking result. 

[VolvoGirl]

Did they get two 1099R forms?  What codes are in box 7 on them?  Do the right amounts  show up on 1040 lines 4a and 4b?   How much is the tax due on 1040 line 37?   Maybe a IRA question was answered wrong and they owe a early withdrawal penalty or an excess accumulation penalty.

If the tax return is right I would ignore the strange rate, etc.  @dmertz  

[SisterHelpingWithTaxes]

Did they get two 1099R forms? 
Yes

What codes are in box 7 on them? 
The one for the rollover amount (not taxed) is 4G, The code on the form for the taxable distribution is 4. 

Do the right amounts  show up on 1040 lines 4a and 4b?   
I can't seem to get to the screen that shows me the draft 1040 - any tips? 

How much is the tax due on 1040 line 37?   Maybe a IRA question was answered wrong and they owe a early withdrawal penalty or an excess accumulation penalty.

I can't seem to get to the screen that shows me the draft 1040 - any tips? 

If the tax return is right I would ignore the strange rate, etc. 
I don't want to pay $4000+ on taxable income of $1100 until I understand how this could be right, ie what is causing it. 

[VolvoGirl]

Are you using the Online version?  And it says the Tax Due is $4,000+?   Before filing you can preview the 1040 or print the whole return. You have to pay any fees first before you can see all the forms, etc.
https://ttlc.intuit.com/community/accessing/help/how-do-i-preview-my-turbotax-online-return-before-f...

[SisterHelpingWithTaxes]

Thanks - I was able to get to the draft 1040-SR. 

Do the right amounts  show up on 1040 lines 4a and 4b?   
4a and 4b show 0 (that seems to be the error as he got $17k as the RMD).  
5a shows the amount rolled over and 5b shows the $17k distribution amount. 

How much is the tax due on 1040 line 37?   Maybe a IRA question was answered wrong and they owe a early withdrawal penalty or an excess accumulation penalty.

Tax due is $4k as stated above. 

[VolvoGirl]

This is for a IRA?  Well first of all the 1099R should be on 1040 line 4 not 5.  The 1099R should have a X checkmark in the little IRA box next to box 7.  So go back and check that box.  Delete the 1099R forms and enter them again.  That usually fixes it.  If you answered the RMD questions wrong it might have given you a penalty on 1040 line 23.  

[Opus 17]

Please explain the "rollover."  An inherited IRA can be rolled over to another inherited IRA.  It can never be rolled over or combined into an account in the person's name unless the person is the deceased person's spouse.  

In other words,  if the IRA is owned by "Jane Smith as heir to John Doe" it can be rolled over into another IRA owned by  "Jane Smith as heir to John Doe", but it can never be rolled over into an IRA owned by Jane Doe alone.

Can you please explain?

[rjs]

@SisterHelpingWithTaxes 

The "blended tax rate" that TurboTax shows you has nothing to do with how your tax is calculated. It's an essentially meaningless number. You should ignore it.

[dmertz]

Did you mistakenly enter the rollover as an IRA contribution, resulting in an excess contribution penalty being present on Schedule 2 line 8 and carrying forward to Form 1040 line 23?

[SisterHelpingWithTaxes]

This is what I determined  based on further review: 

1. This was our deceased relative's 401k rolled over into an inherited IRA (apologies for the confusion). 
2. There were 2 1099Rs received for 2024 - 
   A) the 1st lists the amount rolled over (non-taxable) and
   B) the 2nd lists the RMD distribution (taxable). 
3. When I enter the 2 1099Rs into TT there is a field for each of the 1099Rs that asks for the amount of the "RMD due by Dec 2024". 
4. A) When I enter the RMD required amount in field for "RMD due by Dec 2024" as part of the 1099R reflecting the amount that was rolled over, the system shows a large amount of tax due that seems to include a penalty of $3500+.  
   B) When I enter the RMD required amount in field for "RMD due by Dec 2024" as part of the 1099R reflecting the RMD amount distribution, the system has a much lower tax due that does not include the penalty.  

Since the required RMD was taken and a penalty does not seem appropriate at all, I would assume I should go with 4b for my entries. Let me know if any of you disagree. 

[VolvoGirl]

@dmertz   will have to reply with more details.  But the 401K 1099R goes on line 5  with the word Rollover by  5b.  That's if you can roll over an inherited 401K to a IRA.   And you might have needed to take a RMD from the 401k before rolling over any.   

And did you fix the 1099R for the distribution and put the X in the little IRA box between boxes 7&8?

[SisterHelpingWithTaxes]

Yes, the 401K 1099R is showing on line 5  with the word Rollover by  5b.  

No, I did not fix the 1099R for the distribution and put the X in the little IRA box between boxes 7&8 because I do not want to alter a form received from a financial institution. Plus, while I initially said that this involves an IRA from a deceased relative rolling over into an inherited IRA, it was actually a 401k that the relative had that rolled over into an inherited IRA. Since the little box is labeled IRA/SEP/Simple it does not seem appropriate to have it checked in this case. 

[VolvoGirl]

So there is not a checkmark or X in the little IRA box on the IRA 1099R?  That is what tells that it is from a IRA account and goes on line 4a and 4b.  Better ask about it missing.   Or where did she roll it over to?  Maybe it ended up in another 401K account, not a IRA.  

[dmertz]

These forms indicate that there was no distribution from an IRA, so there should be nothing on Form 1040 lines 4a or 4b.  The entries on lines 5a and 5b seem to be correct.

What your relative received were distributions from an employer plan like a 401(k).  The one with codes 4 and G combined in box 7 is for the rollover to an inherited IRA.  The one with code 4 only is for the decedent's RMD from the employer plan which your relative became required to complete upon the death of the decedent.  Only the amount on the code-4 Form 1099-R is RMD, so this is the amount that you should indicate was the required distribution and is only to be entered when entering the code-4 Form 1099-R.

 When entering the code-4G Form 1099-R, you need to indicate that no RMD was required and that none of it was RMD.  I suspect that you somehow indicated when entering this Form 1099-R that you again indicated that an RMD of $17,000 was required, causing TurboTax to believe that the total RMD requirement was $34,000 and assess a penalty on this second $17,000 that wasn't taken.

[AmeliesUncle]

---

@SisterHelpingWithTaxes wrote: 

• After the standard deduction, the taxable income is $1194. 
  Blended tax rate is shown as 381.5% by TT with Tax Liability of $4,555. 

1040-SR

---

On your Form 1040-SR, what are the amounts on lines 16, 17 and 23?

If you have amounts on lines 17 and/or 23, you need to look at your "Schedule 2" tax form to see what the additional tax is for.