Form 8606 must include Inherited IRA withdrawals?

[mlgillette]

My husband has both a traditional IRA (with some nondeductible contributions) and a non-spouse inherited IRA (with no nondeductible contributions).  He withdrew money from both accounts in 2019 and 2020.

TurboTax, for 2019, included only his traditional IRA withdrawal on form 8606.

TurboTax, for 2020, now includes the sum of both withdrawals on form 8606.

I can't find any IRS information about a tax law change that might explain the different treatment for 2019 and 2020.  Is TurboTax correctly handling this in both years, or do I likely have a mistake somewhere?

[fanfare]

"TurboTax, for 2020, now includes the sum of both withdrawals on form 8606."

That's wrong.

That means he did not tell TurboTax one of them was inherited. OR TurboTax has a bug.

Since inherited IRA has no basis, Form 8606 does not get involved.

[mlgillette]

Thanks!

I deleted his 1099R for the inherited IRA withdrawal, and re-entered it to ensure that it is correctly marked as an inherited IRA, which it appears to be.  I believe that an inherited IRA can have a basis if the original owner made nondeductible contributions; in our case, there were no nondeductible contributions, so no basis.

I spent two hours on the phone with TT support, including with their Tax Advice group, and no resolution.  They need to do more research!

Even IRS 590-B for 2019 (no 2020 yet available) says you cannot use one 8606 for two withdrawals, both of which have a basis.  You have to use two 8606s.  I am still hopeful it's a TT bug.

Thanks again for your help and quick response.

[fanfare]

your inherited IRA does not have a basis, you said, so there is no issue.

the form 8606 should reflect your own IRAs only.

TurboTax support should be able to tell you that immediately.

[macuser_22]

Inherited IRA's can indeed have a basis.     You would need the last filed 8606 form for the inherited IRA to get the line 14 amount to enter in the 1099-R interview.

TurboTax ONLY supports 8606 forms for the taxpayer and spouse.    Inherited IRA basis is required by the tax law to be kept separate and that is not supported by TurboTax.   You would have to manually fill out a 8606 in the name of the deceased with you as benificuary and attach that to a mailed tax return - it cannot be e-filed.

Also see this TurboTax FAQ:

https://ttlc.intuit.com/community/accessing/help/where-do-i-find-form-8606/00/25713

We'll automatically generate and fill out Form 8606 (Nondeductible IRAs) if you reported any of these on your tax return:

• Nondeductible contributions made to a traditional IRA
• Distributions from a traditional, SEP or SIMPLE IRA that had nondeductible contributions (excluding rollovers, conversions, recharacterizations, qualified charitable distributions, one-time distribution to fund an HSA, or return of certain contributions)
• Conversions from a traditional, SEP, or SIMPLE IRA to a Roth IRA
• Distributions from a Roth IRA (other than rollovers, recharacterizations, or a return of certain contributions)

However, if any of these 3 situations apply to you:

1. You received a distribution from an inherited traditional IRA that had nondeductible contributions
2. You transferred an inherited plan account to a Roth IRA
3. You received a distribution from an inherited Roth IRA that was not a qualified distribution

then you'll have to download and print Form 8606, manually fill it out (instructions), and print and file your return, as you won't be able to e-file.

[mlgillette]

After another 90 minutes on the phone with TurboTax Support, they agreed that the inherited IRA withdrawal should NOT be included on 8606.  They walked me through an odd process to reset some values, using step-by-step, on the 1099 for this withdrawal, and it dropped off the form.  Thanks to all who contributed.

[macuser_22]

---

@mlgillette wrote:

After another 90 minutes on the phone with TurboTax Support, they agreed that the inherited IRA withdrawal should NOT be included on 8606.  They walked me through an odd process to reset some values, using step-by-step, on the 1099 for this withdrawal, and it dropped off the form.  Thanks to all who contributed.

---

As I said above, it is not included on *your* 8606.   If the inherited IRA has it's own non-deductible basis then it must be reported on a separate 8606 for the inherited IRA. 

If the inherited IRA has no non-deductible contributions at all and no basis the  it is not reported on ANY 8606 at all.  

The basis on an inherited IRA cannot be combined with your own IRA basis.

IRS pub 590B

quote

IRA with basis.

If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you can't combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.

[mlgillette]

Yes, I quoted that exact paragraph from 590B to the agents yesterday.  I kept telling them that the inherited IRA never had any nondeductible contributions, but honestly, no one I spoke to seemed to understand these complexities.  But it finally got resolved, and isn't on my husband's 8606 any longer.  So, all good.  Thanks again for your insights.

[macuser_22]

I think I see what you were alluding to.    Inherited IRA 8606's cannot be combined with your own 8606 but TurboTax seems to be adding the gross (box 1) amount form an inherited IRA with a code 4 improperly to your own 8606 form line 7 - it should not.

That appears to be a bug.

@dmertz ?

[dmertz]

I concur, TurboTax is including the distribution from the inherited IRA on the beneficiary's Form 8606, which is incorrect.

I also noticed that TurboTax is no longer presenting the option for indicating that an entire traditional IRA distribution was converted to Roth.  It's now necessary for some reason to indicate that a combination was done, then enter the amount that was conversed.

The developers have really mangled the 1099-R stuff this year, more than usual.

[macuser_22 · Accepted solution]

I noticed as a workaround of the Inherited 1099-R is edited and the question that asks of the inherited IRA had a non-deductible basis, answer "yes" , then check the "no" answer again and the 8606 then removes the inherited IRA amount from the 8606 line 7.  (I don't know if that works in all cases).

[dmertz]

This bug (including code-4 Form 1099-R on beneficiary's Form 8606) was in R1 of 2020 TurboTax but was not in the final version of 2019 TurboTax.

[dmertz]

Yes, I see that behavior.  Bizarre.  There is something going on behind the scenes that is not reflected on TurboTax's 1099-R form.  I've noticed several instances of that this year with Forms 1099-R.

[mlgillette]

Yes, this is the workaround that TT Support finally led me through, using step-by-step, on the phone, and it removed the improper entry from the 8606.

Truth is, initially when TT added the inherited IRA distribution on line 7, it implied to me that I should also include the full balance of that inherited IRA on line 6, along with my husband's traditional IRA.  Doing so made the nontaxable percent on line 10 even smaller, of course.  I am sorry we ever made nondeductible contributions to our traditional IRAs; the tax benefit each year is nearly negligible, and I spend more time on this form that the entire rest of our return combined.

[dmertz]

The hard part about From 8606 is gaining the initial understanding of the form.  Once you have that, it's relatively easy to deal with, except when the TurboTax developers mess up TurboTax's handling of this form (which tends to be all too often, unfortunately).