Deduction on From 1041 for Estate Tax paid on value of IRA reported on From 706

In Turbo Tax’s calculators and tips for 2011 and under the heading Estates & Trusts I found the following example:

I inherited my mother's traditional IRA. Do I have to pay tax on the full amount I receive each year from the account?

Actually, when you inherit an IRA, there's an easily overlooked deduction. If the estate was large enough to be subject to federal estate tax.................you can deduct the portion of the federal estate tax attributable to the IRA.

My question is:

We have a trust that inherited IRAs and reported them on form 706 and paid estate tax on them. Also In the same year the trust cashed in the IRAs and has to report the full value as income on the state and federal 1041s.

My reading of the above example is that it can deduct the amount of estate tax paid on the value of the IRAs.

If this is correct where we deduct them on form 1041 and does this apply to both the state and federal returns and how would it appear?

I would really appreciate any help you can give me on this one
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    You are partially correct.
    In general, if a Trust is named as the beneficiary of an IRA, technically it cannot be a designated beneficiary.  It is the live  beneficiaries of the Trust who then receive the income and pay the taxes on that income.

    As to the deduction for Estate Tax paid, therefore were this not an IRA and its lump sum, the Trust could optionally take the deduction but as it is an IRA lump sum distribution, it is not the Trust that deducts the Estate Tax but rather the beneficiaries.  As to when to take the deduction, if the distributions were RMDs, the Estate Tax deduction would have to be used over time against the series of RMDs reported as income. Here where a lump sum distribution was made, it would all be in the year of that distribution.

    Estate Tax Deduction

    Income a decedent had a right to receive is included in the decedent's gross estate and is subject to estate tax. This income in respect of a decedent is also taxed when received by the recipient (estate or beneficiary). However, an income tax deduction is allowed to the recipient for the estate tax paid on the income.

    The deduction for estate tax can only be claimed for the same tax year in which the income in respect of a decedent must be included in the recipient's income. (This also is true for income in respect of a prior decedent.)

    Individuals can claim this deduction only as an itemized deduction on line 28 of Schedule A (Form 1040). This deduction is not subject to the 2% limit on miscellaneous itemized deductions. Estates can claim the deduction on the line provided for the deduction on Form 1041. For the alternative minimum tax computation, the deduction is not included as an itemized deduction that is an adjustment to taxable income.

    If income in respect of a decedent is capital gain income, you must reduce the gain, but not below zero, by any deduction for estate tax paid on such gain. This applies in figuring the following.

        The maximum tax on net capital gain (including qualified dividends).

        The 50% exclusion for gain on small business stock.

        The limitation on capital losses.

    Computation

    To figure a recipient's estate tax deduction, determine:

        The estate tax that qualifies for the deduction, and

        The recipient's part of the deductible tax.

    Deductible estate tax.   The estate tax is the tax on the taxable estate, reduced by any credits allowed. The estate tax qualifying for the deduction is the part of the net value of all the items in the estate that represents income in respect of a decedent. Net value is the excess of the items of income in respect of a decedent over the items of expenses in respect of a decedent. The deductible estate tax is the difference between the actual estate tax and the estate tax determined without including net value.

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    s/ Scruffy_Curmudgeon - Not now or ever an Intuit employee --
    IAFF retired Firefighter(FF1|2)&Paramedic, -USAR O3 AIS/ASA '66-'67
    any/all thanks appreciated
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