Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Uh, I do all my returns by hand, in paper and pencil. And I have to file income tax in multiple states. Really, it is no big deal. Ad my 4 children all < 25 do theirs by hand also.
Your other points are well taken.
Your other points are well taken.
Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
For what it's worth, since most people don't carry a basis in their tIRA, I suspect most heirs either withdraw all the money when they get it, don't know there is a basis, or forget about it and pay taxes on the whole withdrawal. In fact, it only takes one year to change tax preparers and if they don't look for any basis on the previous year return and the taxpayer doesn't mention it, they will prepare the return without any basis. If they import the return the following year, they will no longer have any basis to report.
Those sophisticated enough to know about basis in tIRAs probably already live in Boglehead-land. As an example, many tax preparers don't even understand how to report a simple backdoor Roth as they aren't common in the general population.
Those sophisticated enough to know about basis in tIRAs probably already live in Boglehead-land. As an example, many tax preparers don't even understand how to report a simple backdoor Roth as they aren't common in the general population.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Don't tell anyone, but the IRA DH inherited from FIL probably had about 1% of the value as basis, but I've ignored that the last 2 years on our taxes.
As part of FIL's older tax files I've seen an 8606 showing some basis in the account. But the executor and CPA that handled the estate, and the brokerage that held and divided the account among the siblings, never told us about the basis so I haven't pressed it. It's one more thing on a long list of things that the executor should have taken care of but did not, and was not worth the time and trouble of educating the executor about tax law so that he understood what basis is and why he should make sure we knew about it.
As part of FIL's older tax files I've seen an 8606 showing some basis in the account. But the executor and CPA that handled the estate, and the brokerage that held and divided the account among the siblings, never told us about the basis so I haven't pressed it. It's one more thing on a long list of things that the executor should have taken care of but did not, and was not worth the time and trouble of educating the executor about tax law so that he understood what basis is and why he should make sure we knew about it.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Every TIRA has basis. It is just that the basis is often zero. The IRS has stated that it is generally acceptable to use zero as a basis even if the true basis is not zero.
Also, non-spouse heirs might be charities, who don't need to care about basis.
Also, non-spouse heirs might be charities, who don't need to care about basis.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
I bet they would love it if everyone did that.dodecahedron wrote: ↑Fri May 04, 2018 7:56 amThe IRS has stated that it is generally acceptable to use zero as a basis even if the true basis is not zero.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
I would use a broader brush:
Don't make non-deductible contributions to an IRA unless a Roth conversion is on the horizon.
Don't make non-deductible contributions to an IRA unless a Roth conversion is on the horizon.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Despite what I said above, yeah, I do have to concede that a significant basis is worth tracking and that it can be a pain to do so.
I have not had to deal with TIRA basis, but I do recall the annoyances of dealing with basis on gifted securities in the past. It was annoying. I remember telling my husband we should donate existing equities in taxable to charity and that future equities had to go into our retirement plans (including a large Roth) because I just didn't want to deal with tracking basis of many purchases over many years. He agreed.
But now that taxable account custodians track basis, I am willing to hold equities in taxable again. Unfortunately TIRA custodians have no way to track basis.
I have not had to deal with TIRA basis, but I do recall the annoyances of dealing with basis on gifted securities in the past. It was annoying. I remember telling my husband we should donate existing equities in taxable to charity and that future equities had to go into our retirement plans (including a large Roth) because I just didn't want to deal with tracking basis of many purchases over many years. He agreed.
But now that taxable account custodians track basis, I am willing to hold equities in taxable again. Unfortunately TIRA custodians have no way to track basis.
Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
That has not been my experience. I have had a basis in my IRA for years and the software handles it quite easily including ROTH conversions and recharacterization.dodecahedron wrote: ↑Fri May 04, 2018 8:26 am I do have to concede that a significant basis is worth tracking and that it can be a pain to do so.
I also seem to recall a practice problem in our TaxAide training that had multiple IRAs (one inherited) with basis in each and the software handled the multiple 8606 forms without a problem [edit: it may have been a spousal IRA]. I don't know if it would have e-filed but a paper return is only slightly more of a hassle than e-filing.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Do you have a reference for this?dodecahedron wrote: ↑Fri May 04, 2018 7:56 am ... The IRS has stated that it is generally acceptable to use zero as a basis even if the true basis is not zero...
EDIT:
Well I found this, https://ttlc.intuit.com/questions/4155255 , and I guess it makes sense since it's in the IRS favor, but I'd like to see something from a more authoritative source
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
I offer my services as a heir to anybody who has a TIRA with basis.
Feel free to hate me if you like, although it is not necessary.
Required non-random smilies:
Feel free to hate me if you like, although it is not necessary.
Required non-random smilies:
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
In the only related guidance I am aware of. The IRS has stated that owner-only small businesses must take all deductions they are entitled to. Lest they derive a benefit they are not entitled to, e.g. earned income tax credit, retirement plan contributiofitns, etc...
I could see that guidance extending to individual taxpayers and basis. Failure to apply basis would also be considered artificially increasing income. If the taxpayer derives a benefit from that income increase it would be improper.
Many tax provisions are based on AGI/MAGI with the vast majority causing your tax liability increasing with an increase in AGI/MAGI. The only two exceptions I can think of are; increasing your MAGI so that you qualify for ACA subsidies and cost sharing, The new 20% pass-thru deduction is limited to taxable income. If you are limited, increasing taxable income increases the deduction. Can anybody else think of any others.
I could see that guidance extending to individual taxpayers and basis. Failure to apply basis would also be considered artificially increasing income. If the taxpayer derives a benefit from that income increase it would be improper.
Many tax provisions are based on AGI/MAGI with the vast majority causing your tax liability increasing with an increase in AGI/MAGI. The only two exceptions I can think of are; increasing your MAGI so that you qualify for ACA subsidies and cost sharing, The new 20% pass-thru deduction is limited to taxable income. If you are limited, increasing taxable income increases the deduction. Can anybody else think of any others.
Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Cases where overstating MAGI might benefit a taxpayer inappropriately?Spirit Rider wrote: ↑Fri May 04, 2018 10:36 am Many tax provisions are based on AGI/MAGI with the vast majority causing your tax liability increasing with an increase in AGI/MAGI. The only two exceptions I can think of are; increasing your MAGI so that you qualify for ACA subsidies and cost sharing, The new 20% pass-thru deduction is limited to taxable income. If you are limited, increasing taxable income increases the deduction. Can anybody else think of any others.
ACA minimum income qualification as you point out would be a big one. Support test for a dependent that didn't want to be dependent for whatever reason might be another. Some states allow a deduction for federal taxes paid and I suppose it's possible that a higher federal tax bill might be advantageous at a state level but that's probably a long shot.
Of course retirement plan contribution limits and self employed health insurance deductibility if they were self employed.
Hard to say whether the benefit outweighs the increased tax burden on most of those. Being able to qualify for ACA rather than Medicaid (especially in non-expansion states) is the most clear cut I think.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
This.dodecahedron wrote: ↑Fri May 04, 2018 7:56 am Also, non-spouse heirs might be charities, who don't need to care about basis.
Where the tides of fortune take us, no man can know.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
I'll second that!Epsilon Delta wrote: ↑Fri May 04, 2018 9:34 am I offer my services as a heir to anybody who has a TIRA with basis.
Feel free to hate me if you like, although it is not necessary.
In fact if it helps the cause I will agree to ignore the basis!
I love simulated data. It turns the impossible into the possible!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
The IRS working assumption in audits is that basis is zero unless the taxpayer (TP) has evidence otherwise. Tax Court opinions have said that the burden of proof for a nonzero basis is on the TP. In the absence of such evidence provided by the TP, Tax Court has ruled that the basis is zero.JoMoney wrote: ↑Fri May 04, 2018 8:57 amDo you have a reference for this?dodecahedron wrote: ↑Fri May 04, 2018 7:56 am ... The IRS has stated that it is generally acceptable to use zero as a basis even if the true basis is not zero...
EDIT:
Well I found this, https://ttlc.intuit.com/questions/4155255 , and I guess it makes sense since it's in the IRS favor, but I'd like to see something from a more authoritative source
Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
+1House Blend wrote: ↑Fri May 04, 2018 8:25 am I would use a broader brush:
Don't make non-deductible contributions to an IRA unless a Roth conversion is on the horizon.
RIP Mr. Bogle.
Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
I guess this might be applicable casedodecahedron wrote: ↑Fri May 04, 2018 4:38 pmThe IRS working assumption in audits is that basis is zero unless the taxpayer (TP) has evidence otherwise. Tax Court opinions have said that the burden of proof for a nonzero basis is on the TP. In the absence of such evidence provided by the TP, Tax Court has ruled that the basis is zero.JoMoney wrote: ↑Fri May 04, 2018 8:57 amDo you have a reference for this?dodecahedron wrote: ↑Fri May 04, 2018 7:56 am ... The IRS has stated that it is generally acceptable to use zero as a basis even if the true basis is not zero...
EDIT:
Well I found this, https://ttlc.intuit.com/questions/4155255 , and I guess it makes sense since it's in the IRS favor, but I'd like to see something from a more authoritative source
http://www.legalbitstream.com/scripts/i ... d1b4/1/doc
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Good example of the case law I was referring to.JoMoney wrote: ↑Fri May 04, 2018 5:02 pmI guess this might be applicable casedodecahedron wrote: ↑Fri May 04, 2018 4:38 pmThe IRS working assumption in audits is that basis is zero unless the taxpayer (TP) has evidence otherwise. Tax Court opinions have said that the burden of proof for a nonzero basis is on the TP. In the absence of such evidence provided by the TP, Tax Court has ruled that the basis is zero.JoMoney wrote: ↑Fri May 04, 2018 8:57 amDo you have a reference for this?dodecahedron wrote: ↑Fri May 04, 2018 7:56 am ... The IRS has stated that it is generally acceptable to use zero as a basis even if the true basis is not zero...
EDIT:
Well I found this, https://ttlc.intuit.com/questions/4155255 , and I guess it makes sense since it's in the IRS favor, but I'd like to see something from a more authoritative source
http://www.legalbitstream.com/scripts/i ... d1b4/1/doc
There was comprehensive legal scholarship by Prof Jim Maule on this issue in a 2007 article here. Note that the only potential problem areas in that paper involved computation of self-employment income, but basis of an IRA does not affect that item at all.
Article was written prior to ACA, but to my knowledge the Tax Court has not yet ruled on any cases where a TP used a zero basis in order to raise MAGI for that particular purpose.
Except possibly in the relatively narrow set of cases where the TP might gain an ACA advantage from use of zero basis, there is generally solid support for use of zero basis if it is more convenient for the TP.
Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
This comes up almost every year when I am instructing TaxAide volunteers. The question typically arises around self-employment income and the question as to whether we can allow a TP to file without certain deductions on Schedule C that would otherwise be out of scope for us.dodecahedron wrote: ↑Fri May 04, 2018 5:25 pm There was comprehensive legal scholarship by Prof Jim Maule on this issue in a 2007 article here. Note that the only potential problem areas in that paper involved computation of self-employment income, but basis of an IRA does not affect that item at all.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Yes, absolutely, the law clearly requires that all applicable deductions be taken on a Sched C for computing self-employment income for the population in the income brackets typically using tax assistance sites. That is a big issue highlighted for VITA and AARP up here in NY as well.jebmke wrote: ↑Fri May 04, 2018 5:33 pmThis comes up almost every year when I am instructing TaxAide volunteers. The question typically arises around self-employment income and the question as to whether we can allow a TP to file without certain deductions on Schedule C that would otherwise be out of scope for us.dodecahedron wrote: ↑Fri May 04, 2018 5:25 pm There was comprehensive legal scholarship by Prof Jim Maule on this issue in a 2007 article here. Note that the only potential problem areas in that paper involved computation of self-employment income, but basis of an IRA does not affect that item at all.
But cost basis on an IRA (inherited or otherwise) is not a Sched C deduction.
Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
I love my inherited IRA! The scenario of multiple inherited IRA's with non-zero basis does sound like a nuisance, but the odds of that are pretty slim. I've learned a lot over 18 years or so with an inherited tIRA about RMD's, the growth of accounts even where you are drawing on it annually, sequence of return risk (inherited in 2000 - yikes!), transferring assets to future generations with positions intact, managing approaches to an annual cash withdrawal etc.letsgobobby wrote: ↑Thu May 03, 2018 11:07 pm Remember, your non-spouse heirs cannot convert their inherited TIRA to a Roth; and cannot combine the inherited IRA with their own IRAs. Barring a major tax rate differential, it seems wiser for the decedent to have converted the TIRA to a Roth before death (granted, not everyone gets that chance...).
My parents passed away in 1990 and 2000 but i always toast them and say thanks Mom and Dad when the cash comes out. We've used it for lots of things - college bills, to fund a spousal IRA when on one income, just plain spending, savings etc. It's not a huge sum but its like a little money tree with an always welcome annual harvest.
It taught me two decades ahead of retirement that you can have your cake and eat it too. I've seen where many all-cash and liquid inheritances get spent almost immediately. On the flip side, I read posts here where people have built money mountains for their whole lives and say that many years into retirement they have never spent a dime of it. Both situations seem a bit unfortunate. Tending to an inherited IRA has shown me the middle ground. Cumulatively it's spun off a lot of useable income and yet the the balance is much higher than when inherited and many multiples more than the 2002 "bottom" not long after inheritance.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
The sad reality is that a significant number of Americans squander their inheritances immediately including retirement accounts. In fact the retirements accounts can put them in untenable positions. They blow an Inherited IRA not realizing the distributions were taxable. When the tax bill becomes due they end up with a negative savings rate.
Sometimes we forget that a large segment of the population is not financial literate. Luckily, I was already reading the Bogleheads Unite forum on Morningstar. So I knew exactly what to do. I have known people who took a full distribution and then were shocked to learn they couldn't roll part of it over.
Sometimes we forget that a large segment of the population is not financial literate. Luckily, I was already reading the Bogleheads Unite forum on Morningstar. So I knew exactly what to do. I have known people who took a full distribution and then were shocked to learn they couldn't roll part of it over.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
We face the same problem out west as well. A recent problem for us are SE individuals that put a lot of miles on their car. When they find those miles put them over the $25k expense limit for Sch C under AARP, which makes it out of scope, then they want us to not claim them, which is strictly a way to get your site shut down if you willing fall into that trap.jebmke wrote: ↑Fri May 04, 2018 5:33 pmThis comes up almost every year when I am instructing TaxAide volunteers. The question typically arises around self-employment income and the question as to whether we can allow a TP to file without certain deductions on Schedule C that would otherwise be out of scope for us.dodecahedron wrote: ↑Fri May 04, 2018 5:25 pm There was comprehensive legal scholarship by Prof Jim Maule on this issue in a 2007 article here. Note that the only potential problem areas in that paper involved computation of self-employment income, but basis of an IRA does not affect that item at all.
The other bigger issue are people trying to "play" the earned income credit by reporting just enough income to get a big pay check back. This could certainly happen if someone doesn't report all their deductions on Sch C.
All of the above is off topic, so let me get back on by saying the same logic that applies to the basis of an inherited IRA, applies to the basis of any asset - real estate or individual stock. If there is no record it is up to the taxpayer to be able to claim something other than zero. Early on I sometimes spent an hour(s) trying to reconstruct the basis, only to realize it made absolutely no difference to the taxable income, because the person would have no taxable income even with zero basis.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
My basis is so small that I wonder if it will even be worth using. It represents less than 1% of the valueof my IRA like the poster above. Given inflation, it seems smaller every year. It is just under $6k and I last filed the form in 2001.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
I'm going to do Roth conversions when I retire early, but I don't think I will get it all converted. That will leave even less basis to bother with.letsgobobby wrote: ↑Sat May 05, 2018 10:04 amhow can you get rid of it?michaeljc70 wrote: ↑Sat May 05, 2018 9:55 am My basis is so small that I wonder if it will even be worth using. It represents less than 1% of the valueof my IRA like the poster above. Given inflation, it seems smaller every year. It is just under $6k and I last filed the form in 2001.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Congratulations, I guess?MrPotatoHead wrote: ↑Thu May 03, 2018 11:44 pm Uh, I do all my returns by hand, in paper and pencil. And I have to file income tax in multiple states. Really, it is no big deal. Ad my 4 children all < 25 do theirs by hand also.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
What is that expression? "don't look a gift horse in the mouth"? Isn't this applicable here?
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
As they say, nothing is free....wrongfunds wrote: ↑Sat May 05, 2018 10:52 am What is that expression? "don't look a gift horse in the mouth"? Isn't this applicable here?
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
It's a false dichotomy to present the choices as "efile or do it by hand". You can prepare tax returns with software and then mail the return.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
That's a different problem. I'm not familiar enough with various software packages to suggest anything.letsgobobby wrote: ↑Sat May 05, 2018 1:03 pmNot always. My software cannot correctly compute multiple 8606s so it puts incorrect numbers on practically every form.Earl Lemongrab wrote: ↑Sat May 05, 2018 12:41 pm It's a false dichotomy to present the choices as "efile or do it by hand". You can prepare tax returns with software and then mail the return.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Fair enough, and I can't refute without some research, but then the person should have said that. It's still a false dichotomy as presented.letsgobobby wrote: ↑Sat May 05, 2018 1:10 pmIt's a widespread problem, so suggesting someone can just use the software and print the return is a bad suggestion.Earl Lemongrab wrote: ↑Sat May 05, 2018 1:06 pmThat's a different problem. I'm not familiar enough with various software packages to suggest anything.letsgobobby wrote: ↑Sat May 05, 2018 1:03 pm Not always. My software cannot correctly compute multiple 8606s so it puts incorrect numbers on practically every form.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
The dichotomy of "efile or do it by hand" is the one in question. As I stated, if the original statement were "use tax software for the return or do it by hand" then that's a different and quite possibly correct dichotomy.letsgobobby wrote: ↑Sat May 05, 2018 1:22 pm All you have to do is provide evidence of tax prep software that handles this problem. Let me know when you do. Until then, it's presumptuous to say the statement is false. It's important for others to know that your suggestion has not been functional to any individual taxpayer as far as I know.
As far as a counter-example, I'm not sure if it's possible to find out because it's not likely a listed feature. Aside from buying and testing candidates.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
This is not a third world problem.letsgobobby wrote: ↑Thu May 03, 2018 11:07 pm If they ever have to do more than one Form 8606 (ie, inherited IRAs from more than one decedent; backdoor Roth IRAs; their own IRA with basis; etc) they will not be able to use e-file with any publicly available tax prep software. Best case scenario they will have to complete some of the 8606s by hand, then print and paper file; worst case scenario they will have to do almost the entirety of their return by hand, including paper file. Or they could pay a professional a few hundred dollars to handle their return which they otherwise would have done for $20 with tax software.
Remember, your non-spouse heirs cannot convert their inherited TIRA to a Roth; and cannot combine the inherited IRA with their own IRAs. Barring a major tax rate differential, it seems wiser for the decedent to have converted the TIRA to a Roth before death (granted, not everyone gets that chance...).
Hope this helps someone, some day.
Forget e-file. Print that tall stack of paper out. Seal it up in a manilla envelope. Take it to the Post Office and send it off to the appropriate address.
And then thank the family member who had you as a beneficiary of their money as you drive home from the Post Office.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
why not donate the whole thing to charity? you would not have to worry about it then at all!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Because you might prefer your heirs get the money?wrongfunds wrote: ↑Sat May 05, 2018 7:30 pm why not donate the whole thing to charity? you would not have to worry about it then at all!
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
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Last edited by letsgobobby on Fri May 24, 2019 5:36 pm, edited 1 time in total.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
LOL.zaboomafoozarg wrote: ↑Sat May 05, 2018 10:48 amCongratulations, I guess?MrPotatoHead wrote: ↑Thu May 03, 2018 11:44 pm Uh, I do all my returns by hand, in paper and pencil. And I have to file income tax in multiple states. Really, it is no big deal. Ad my 4 children all < 25 do theirs by hand also.
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Re: Don't leave your non-spouse heirs TIRAs with basis, unless you hate them!
Oh, I read it as the OP leaving it to charity instead of to beneficiaries. Now I'm not sure.letsgobobby wrote: ↑Sat May 05, 2018 8:50 pmNon spouses cannot donate inherited IRAs without first withdrawing the funds. I think. Otherwise a great idea.wrongfunds wrote: ↑Sat May 05, 2018 7:30 pm why not donate the whole thing to charity? you would not have to worry about it then at all!