15 Jan Double taxation for some IRAs

Q. How does the new tax legislation affect current “Income with Respect to a Decedent,” or IRD, with respect to offsetting taxes on an inherited IRA. I’m the beneficiary of my late brother’s IRA, approaching year three of the five-year distribution, and I still have about $600,000 if the offset remaining.
— Beneficiary

A. The taxation of an inherited IRA can be complicated.

If you inherit an IRA from someone who is not your spouse, the IRA may be subject to double taxation, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“The first level of taxation comes if the decedent’s estate is large enough to be subject to federal estate tax,” he said. “The second level of taxation comes when you are required to make annual distributions from the IRA. You must include the distribution as income on your tax return, resulting in additional income tax.”

Kiely said the government tried to mitigate this double taxation by allowing you deduct the portion of the estate tax that was paid on the IRA distribution.

Publication 17 says: “You can deduct the estate tax attributable to income in respect of a decedent if you, as a beneficiary, must include that income in your gross income. In that case, deduct the estate tax as a miscellaneous deduction that isn’t subject to the 2%-of-adjusted-gross-income limit.”

But then came the Tax Cuts and Jobs Act of 2017.

“This act, which was recently signed by the president, suspends miscellaneous itemized deductions,” Kiely said.

But there are 12 exceptions, and Income with Respect to a Decedent is one of them.***

***The original version of this story mistakenly said the deduction couldn’t be taken in this case.

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This post was first published in January 2018.