Inherited IRA Distributions for 2023

[ts48042]

I am a sole designated beneficiary of an inherited IRA.  In 2020 my mother passed away at the age of 74.  She was taking her RMD at the time I inherited the IRA in 2020.  I did not take any distributions in 2021, 2022 or 2023.  I read that the IRS has decided that RMD's were not required in those years as there was confusion about the SECURE 1.0 act.  I am also hearing now that Secure 2.0 says the IRS will waive the RMD for at least years 2020, 2021 and 2022.  I did take a distribution in 2023 (well above what would have been the RMD for my age and the 10 years that I have to deplete the account). While doing my taxes on Turbotax, Turbotax is assessing the 25% excise tax/fee.  This is not right is it?  I even changed up the answers to the questions on my mom's age and date of death (made it so that her age was like 65 and that she died in 2022 so as to make it look at though 2023 is the first year a beneficiary had to take an RMD) and Turbotax is still applying the 25% excise fee.  Am I missing something here or is Turbotax just flat out wrong?  Help please....

[dmertz]

There is nothing in TurboTax that would cause a 25% excise tax to be assessed on a distribution paid to you as beneficiary.  The only type of distribution where a 25% excise tax could apply is if the Form 1099-R has code S in box 7 indicating that the distribution was paid to the participant in a SIMPLE-IRA plan within the first 2 years of participation in that plan.  No distribution paid to a beneficiary would have code S.

Make sure that you have answered Yes, when asked if the IRA held by XXX is an inherited IRA.

Where are you seeing a 25% excise tax being applied?

Are you confusing normal income tax liability with an excise tax?  It's not unreasonable that you would have a marginal income tax rate of around 25%.  This is taxable income, after all.

[ts48042]

My form has '4' in box 7 and no other codes.    I did check the inherited IRA box.  This is not nominal tax. My nominal tax rate is 15.1 % without the 1099 R distribution income added and 15.9% with the 1099R distribution income added.

If I remove the 1099R altogether  my tax liability goes down by an amount equal to the 1099R distribution times the 25%.  Coincidence?  I don't think so.

I'm not an IRS expert but I am by no means oblivious to taxes as I have been doing them for myself and others for over 27 years. 

[VolvoGirl]

When you enter one taxable transaction, you can't just watch the monitor.  You increased your overall adjusted gross income and with that come many other changes in your return, not just the incremental tax on the one transaction.

Like for example it increased your AGI and that would decrease some deductions if you itemized on Schedule A.  And by increasing your AGI it might reduce some credits you were getting like EIC.  And can make more of any Social Security taxable.

You would have to compare both returns line by line before and after you entered the income to see all the changes.

[ts48042]

I've already done that (before I came to the community with questions) 🙂

The distribution amount was only $7000

I do not itemize

I still am receiving the max Child tax credit

My nominal tax rate is 15.1% without the distribution and 15.9% with it. 

[dmertz]

If by "nominal tax rate" you mean what TurboTax calls "effective tax rate," that's a useless number for understanding how an increment in income increases your tax liability.  Marginal tax rate is what matters, the ratio of your change in tax liability to the change in taxable income, which you say is 25%.  An increase in tax liability of around $1,100 (25%) for a $7,000 increase in income can easily result in a change from 15.1% to 15.9% in effective tax rate.  It's certainly not being caused by a 25% penalty on anything.

As VolvoGirl said, to understand the reason for your change in tax liability you must compare your Form 1040 with and without this $7,000 of income side-by-side.

A change in effective tax rate of as large as it is when going from 15.1% to 15.9%, I would expect that your marginal tax rate would have to be close to 25%, particularly when you have tax credits such as the child tax credit.

[smaberry]

Ironically, I have the exact same scenario with an inherited IRA - different amount but same result.

With the 1099-R inherited IRA included, my amount of tax goes up exactly 25% of the RMD amount.

Just seems like too much of a coincidence. 

[SusanY1]

That would tend to indicate that the added income is taxed at in the 24% bracket.  Do double check  the entry and be sure that the distribution code is 4 and not a 1, indicating a penalty of any sort. 

Inherited IRA distributions are fully taxable at regular income tax rates on your return, but are not subject to early withdrawal penalties.