Inherited IRA - Reporting Non Deductible Contributions

[Romper]

My daughter inherited my late wife's traditional IRA in 2023.

I have a question related to the reporting of non-deductible contributions she made over the years and how TurboTax will handle these in the future.

The entry of the data was not complicated but different than a normal distribution.

1. I have entered the information from her 1099-R, including box 7 = 4-Death.
2. I have also completed the section "Did daughter inherit the IRA from wife's name" and checked someone else who passed away, including the name and year.
3. On the screen "Tell Us a Little More About This Inherited IRA" I have checked Yes, my wife had nondeductible IRA contributions and entered the Calculated Taxable Amount.

The result is to reduce the Taxable Amount on Line 2a on the screen Enter daughter’s 1099-R. 

Question:

Since I have entered the non-deductible contributions on the 2023 return, how will TurboTax handle this in future years? Will TurboTax recognize that I have entered it already?

I.e. assuming the non-deductible contributions have been applied to the 2023 return, they are not applicable to another year. Do I understand this correctly?

Thanks in advance

[dmertz]

TurboTax is incapable of tracking basis in inherited IRAs and cannot calculate the taxable amount of distributions from inherited IRAs.  As you found, when there is basis in an inherited traditional IRA, the taxable amount must be determined using a separate Form 8606 outside of TurboTax and then just the taxable amount entered into TurboTax when TurboTax asks for it.  TurboTax then replaces the amount originally reported in box 2a of TurboTax's 1099-R form with the amount entered in response to TurboTax's question.  The Form 8606 created outside of TurboTax should then be mailed along with the rest of the tax return.  The IRS instructions for Form 8606 say that all Forms 8606 should be retained in the individual's records essentially forever.

The basis in the inherited traditional IRA should be entered nowhere in TurboTax.  It is not permitted to be combined with any basis your daughter might have in her own traditional IRAs.

[fanfare]

You must use a separate Form 8606 calculation to determine the taxable portion using the basis in the inherited IRA.
The problem is the software won't enter the correct Name:
And it won't handle the case where you too have a basis in your IRA and took a distribution.
-
you can calculate the taxed portion on Form 8606 yourself to discover the proper amount for 1099-R box 2a.
you can start a separate tax return in desktop TurboTax and use that one to calculate the Inherited IRA taxed portion.
Then you have to fudge up a 1099-R that produces those amounts on Form 1040.
---

Do you have the correct taxable amount on Line 4b?
E-file your return, don't file on paper.

After it is ACCEPTED ,
get Form 1040-X from IRS website and mail it in with your 8606, which you can also get in fillable PDF.
Note: since you are not changing any dollar amounts on your amended tax return, you can leave all the lines 1-23 EMPTY.
The names on 8606 should be "<owner> and <your name> BENE" or Beneficiary if it fits, and your SSN.

Part III explanation: "didn't include Form 8606 with e-File".
You will have to mail it so this does not use up your one 1040-X e-File.

---

If you don't want to amend you should File yout tax return on paper by US Mail,

with the appropriate Form 8606.

IRS is now sending back solitary Form 8606 that is not attached to Form 1040-X.

@Romper 

[Romper]

Thankyou fanfare and dmertz

Wow, so complicated.

For your consideration and response..

TurboTax Show Me How To Do This states - Often your plan administrator, broker, banker, etc. has this information. If not, calculate this on ""Form 8606, Nondeductible IRAs"" 

As the "spouse/administrator", I know what is left of the after tax contributions from my wife's form 8606 for 2022.

On the CD desktop version of TurboTax for 2023 it's very easy to enter all the data including name, year of death, and the taxable amount that carries to TurboTax Line 2a on the form 1099-R

Won't that work to apply to my daughters inherited IRA?

Separately - My original question was not addressed:

Since I have entered the non-deductible contributions on the 2023 return, how will TurboTax handle this in future years? Will TurboTax recognize that I have entered it already?
I.e. assuming the non-deductible contributions have been applied to the 2023 return, they are not applicable to another year. Do I understand this correctly?

Thanks in advance
  

[DaveF1006]

Yes, if you continue to file with Turbo Tax, your 8606 information should carryover into the next filing period with the amount of the non-deductible contribution reported in line 6 of form 8606. 

I am confused by your question asking if this is applicable in the later year. If you are wondering if you can take a deduction for the contribution in a later year, the answer is no. If you meant something else, let us know.

[dmertz]

"Won't that work to apply to my daughters inherited IRA?"

That won't work for an inherited IRA.  TurboTax has no capability for you to even enter the basis in an IRA inherited by a non-spouse beneficiary.

"Since I have entered the non-deductible contributions on the 2023 return, how will TurboTax handle this in future years? Will TurboTax recognize that I have entered it already?"

If you are asking in regard to the basis in the IRA inherited by your daughter, as I said, there is nowhere in TurboTax to enter that.  It must be tracked on Forms 8606 prepared outside of TurboTax.

If you are asking about nondeductible contributions made to your daughter's own (not inherited) IRAs or your own IRAs, TurboTax will track that and prepare Form 8606 to report new nondeductible traditional IRA contributions and to calculate the nontaxable and taxable amounts of traditional IRA distributions.  Once applied to a distribution the basis is no longer in the individual's traditional IRAs, reducing the basis remaining in the individual's traditional IRAs.

To be clear, except when a spouse beneficiary rolled an inherited IRA over to their own IRA or assumes ownership, the inherited IRA is still an IRA of the decedent but maintained for the benefit of the beneficiary.

[Romper]

Thankyou Dave F...

After thinking about it, I realized a portion of the non taxable contributions is deducted in each future RMD. Therefore, only the initial entry is needed.

Thanks again

[Romper]

Thanks DMertz
What am I missing?
You state "TurboTax has no capability for you to even enter the basis in an IRA inherited by a non-spouse beneficiary".
I have attached a screen print that clearly shows where to enter the non deductible contributions for my daughters Inherited IRA.
That entry carries through to show the correct amount on Form 1040, Line 4b.

Noting again that this is the CD download desktop version of TurboTax Premier for 2023

If the attached PDF file doesn't come through, go to the screen with the title "Tell Us A Little More About This Inherited IRA"

Comments??

[dmertz]

That screen only asks if there is basis in the inherited IRA, not how much basis is in the inherited IRA.  The purpose of that question is to prompt you to do the pro rata calculation on a Form 8606 outside of TurboTax and enter the resulting taxable amount when you answer Yes to this question.  TurboTax has no ability to actually track the basis in the inherited IRA or to do the pro rata calculation for the inherited IRA, so that must be done outside of TurboTax.

[Romper]

Thanks DMertz

Will my daughter need to complete a Form 8606 for her inherited IRA each year going forward?

[dmertz]

She'll need to complete Form 8606 for each year that she takes a distribution from the inherited IRA.  (The requirements for a beneficiary to take distributions from an inherited IRA are complicated, so I won't get into that here.)

[Romper]

I suppose that means she cannot file electronically and will have to mail the return with the 8606? Correct?

Regarding the complexity of taking distributions from an inherited IRA. That relates to the 10 year rule. Correct?

[dmertz]

Yes, including the Form 8606 for the inherited IRA would require paper filing.

If your daughter is not an eligible designated beneficiary, she is subject to the 10-year rule.  Under the proposed regulations, if your wife died after her Required Beginning Date for RMDs, annual RMDs are required based on your daughter's life expectancy in 2024, reduced by 1 each subsequent year and any remining amount distributed by the end of 2033.  If your wife died before her RBD, the only requirement is that the account be fully distributed by the end of 2033.

[Romper]

Thanks..

The inherited IRA for a non-spouse that has a non deductible basis certainly has complicated things.

I appreciate your feedback.

[Romper]

For DMertz... A bit more guidance if you don't mind.
My daughter inherited two Traditional IRA's from my late wife in 2023. One from Custodian-1 and one from Custodian-2
The value of Custodian-1 has non-deductible contributions. The one form Custodian-2 did not.
In TTax, when I enter the data for Custodian-1, TTax follows with "Tell Us A Little More About This Inherited IRA". It asks for the taxable amount. Upon entering the taxable amount, that amount shows on the screen for entering the 1099-R data, Line 2a.
Am I understanding the following correctly?
Form 8606, Line 2 – I entered the remaining value of my wife’s non-deductible contributions as of 12/31/22. (She died in 2023)
Form 8606, Line 6 asks for value of all the IRA's as of 12/31/23. However, since 8606 is only for Non-Deductible IRA’s, I assume I only report the taxable amount from 8606, Line15c for Custodian-1 (with non-deductible contributions)?
Since the value of Custodian-2 does not have non-deductible contributions, it does not ask for a taxable amount, therefore no 8606 is required.
The only 8606 that to be submitted with the mailed 1040 will be for Custodian-1 (with non-deductible contributions).

Thanks in advance, you've helped me understand this complicated process.