My deceased father's IRA was just distributed to his children. Will I receive a 1099-R for this? Is there a deduction for the income tax I must pay on this inheritance? Does anyone know the code that will be on the 1099-R?

    You should receive a Form 1099-R with a code "4" in Box 7.  This means that the distribution was due to a death.  It also alerts the IRS that the distribution is not subject to any early distribution penalty.  I'm not sure why you think there is a "deduction" for the income tax?  You will include the distribution in your tax return and pay regular income tax on the amount of the distribution that is taxable.  If this is a Traditional IRA without tax basis, the entire distribution will be taxable.
    • QUESTION for Chisx3:
      Did the money that you received actually come directly to you as a "distribution" or did you receive a portion of the IRA account and did you roll it over as an inherited IRA?
    Just to clarify:

    If the proceeds of the IRA are distributed to you then the amount you receive, less any basis in the IRA, will be income to you.  It's very unlikely that the trustee *knows* if there is any basis in the IRA so, most likely, the 1099-R you receive will state that the whole amount is taxable.  It behooves you to try and determine if there's any basis in your father's IRA in order to lower your taxable income.

    If the IRA was transferred to a properly titled inherited IRA via a trustee to trustee transaction then you would not owe taxes on the full amount of the IRA, though you might, depending on the timing of events here, need to take a required minimum distribution which would be taxable.  Again, if there was any basis in your father's IRA that basis carries over to the inherited IRA, meaning the full amount of each RMD should not be taxed.

    Tom Young
    • Thank you for your answers.  My sister insists that since the IRA is part of his estate, and according to the instructions for Schedule A, line 28, there is a deduction for estate distributions under certain circumstances, we should be able to deduct what we withdraw.   She also says that when her husband's mother died (his father was already deceased) they were able to deduct the inheritance from the estate.  From what I read, the key questions may be what my father's Will said about distribution of his IRA, if anything, and whether there was income into the IRA earned before his death but received after it "income in respect of the decedent."  (Words to that effect.)  That does not apply in my Dad's case, since he was long since retired. His IRA was split by Fidelity Investments into equal Inherited IRAs among us kids, and we are now taking distributions from them as needed.  Just trying not to miss anything that might help with the taxes.
    Well, you've added a "clarifying" wrinkle here.  I'm not sure your sister has got this right, but it's a complex area and there are questions that need to be asked in order to nail this down.  If the estate was large enough to pay estate (death) taxes and the IRA is material to the size of the estate then this could be an issue that would warrant talking to a qualified tax expert.

    Here's the section of the Schedule A instructions that your sister is referring to:
    "Federal estate tax deduction.   A beneficiary may be able to claim a deduction for estate tax resulting from certain distributions from a traditional IRA. The beneficiary can deduct the estate tax paid on any part of a distribution that is income in respect of a decedent. He or she can take the deduction for the tax year the income is reported. For information on claiming this deduction, see Estate Tax Deduction under Other Tax Information in Publication 559, Survivors, Executors, and Administrators.

    Any taxable part of a distribution that is not income in respect of a decedent is a payment the beneficiary must include in income. However, the beneficiary cannot take any estate tax deduction for this part."

    Notice that the deduction is available for the ESTATE TAX paid on the distribution, it's not a deduction of the distribution itself.

    Here's the section of Publication 559 referred to by the Schedule A instructions:
    "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.

    [snip - section on capital gains redacted by Tom Young]


    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. "

    There's no need to refer to your father's will here; obviously the beneficiaries were spelled out in the IRA's documentation or Fidelity would not have known how to split up the IRA.

    The *entire* IRA (except for any basis arising from non-deductible contributions) is considered income in respect of the decedent.  So, if there were estate taxes (death taxes) paid on the IRA you could claim a deduction for the estate taxes on the taxable portion of distributions.

    The code in the 1099-R you receive should be a "4."

    Tom Young
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