Inherited IRA with basis Form 8606 TaxAct

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letsgobobby
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Inherited IRA with basis Form 8606 TaxAct

Post by letsgobobby » Fri Jan 19, 2018 1:18 am

Have a small inherited non spousal IRA that had basis. When attempting to enter this info into TaxAct, I couldn’t see an option to enter basis, but found this online:

https://www.taxact.com/support/21070/20 ... -form-8606

Inherited traditional IRA distribution with basis and did not own traditional IRA distributions. If you took a distribution from a traditional IRA you inherited which had a basis, and had no distributions from IRAs which you own, figure the taxable amount of the inherited traditional IRA distribution using the Retirement Plan Distributions Worksheet after entering the distribution on Form 1099-R. File a paper return and include all copies of Forms 1099-R and 8606.


Is this requirement to file a paper return unique to TaxAct? Do I have to file the entire return by paper, meaning I cannot efile at all, or do I just submit an amendment (by paper) after the fact to my efiled return?

Spirit Rider
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by Spirit Rider » Fri Jan 19, 2018 11:14 am

The problem is that if you have basis in an inherited traditional IRA. The instructions require the writing of "Inherited IRA" on the top of the separate Form 8606 for the inherited IRA.

I do not know for sure, but it is very likely that there is no provision in the e-filing data package specifications to provide that information.

letsgobobby
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by letsgobobby » Fri Jan 19, 2018 11:52 pm

Can I efile my tax return then do an amendment with the info about the inherited IRA with basis?

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Epsilon Delta
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by Epsilon Delta » Sat Jan 20, 2018 12:28 am

Can you? Probably.

Should you? Read the jurat you sign when you file:
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year.

Katietsu
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by Katietsu » Sat Jan 20, 2018 12:40 am

If your concern is a quick refund, filing on paper in January does not usually slow the return down much. The exception is if the government shuts down. Haven't heard how that was going tonight.

kaneohe
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by kaneohe » Sat Jan 20, 2018 10:03 am

Does TaxAct allow you to override entries on the forms (which could be dangerous if not used properly). If so , could you calculate the taxable part of the distribution separately and then enter that in line 15b of the 1040. Be sure the total distribution is in 15a. Since there is a discrepancy between the 2 numbers, IRS generally wants you to put a note , e.g. rollover, QCD,etc. I don't know if TaxAct will let you do that.
If you could at least change the 15b number, that might allow you to e-file and then follow up w/ the 8606 amendment w/an explanation of why the 15a/b entries differ. This way all the 1040 numbers/tax/etc would be correct........just missing an explanation....and perhaps you could e-file.

Doing the paper tho seems more straightforward.

letsgobobby
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by letsgobobby » Mon Apr 30, 2018 6:43 pm

With the help of TaxAct help by phone I was able to complete the missing 'spreadsheet ' (8606). I do have to print out and paper file.

I have two inherited traditional IRAs, one from my dad (with no basis) and one from my mom (with basis). Form 8606 requires I "Enter the value of all traditional IRA, SEP and SIMPLE IRA accounts letsgobobby inherited as of December 31, 2017."

Questions:

Do I include the value of both inherited IRAs, from my mom and my dad, in this calculation? Or just my mom's?

My mom's IRA had basis of almost exactly 50%. Why, when I enter her basis, does it calculate that nearly 70% of the distribution is non-taxable?

Example (not real numbers): her TIRA value $25,000, basis $12,500, RMD $1000. If I do not enter the basis, TaxAct says $1000 is taxable. If I enter the basis, it says $700 is non-taxable. Is there some other interplay here between other inherited IRAs, my own (backdoor) Roth IRA, or something else?

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FiveK
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by FiveK » Mon Apr 30, 2018 8:37 pm

letsgobobby wrote:
Mon Apr 30, 2018 6:43 pm
Do I include the value of both inherited IRAs, from my mom and my dad, in this calculation? Or just my mom's?
See Instructions for Form 8606:
If you are required to file Form 8606 for IRAs inherited from more than one
decedent, file a separate Form 8606 for the IRA from each decedent.
Probably worth doing 8606 by hand so you understand what TaxAct is (supposed to be) doing.

And/or see the 'Form8606' tab in the personal finance toolbox spreadsheet.

letsgobobby
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by letsgobobby » Mon Apr 30, 2018 11:41 pm

FiveK wrote:
Mon Apr 30, 2018 8:37 pm
letsgobobby wrote:
Mon Apr 30, 2018 6:43 pm
Do I include the value of both inherited IRAs, from my mom and my dad, in this calculation? Or just my mom's?
See Instructions for Form 8606:
If you are required to file Form 8606 for IRAs inherited from more than one
decedent, file a separate Form 8606 for the IRA from each decedent.
Probably worth doing 8606 by hand so you understand what TaxAct is (supposed to be) doing.

And/or see the 'Form8606' tab in the personal finance toolbox spreadsheet.
On 8606 Line 6, for each 8606 that I complete, should I put the total of all my inherited IRAs? I do not own any non-inherited traditional IRAs.

Spirit Rider
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by Spirit Rider » Mon Apr 30, 2018 11:47 pm

letsgobobby wrote:
Mon Apr 30, 2018 11:41 pm
FiveK wrote:
Mon Apr 30, 2018 8:37 pm
letsgobobby wrote:
Mon Apr 30, 2018 6:43 pm
Do I include the value of both inherited IRAs, from my mom and my dad, in this calculation? Or just my mom's?
See Instructions for Form 8606:
If you are required to file Form 8606 for IRAs inherited from more than one
decedent, file a separate Form 8606 for the IRA from each decedent.
Probably worth doing 8606 by hand so you understand what TaxAct is (supposed to be) doing.

And/or see the 'Form8606' tab in the personal finance toolbox spreadsheet.
On 8606 Line 6, for each 8606 that I complete, should I put the total of all my inherited IRAs? I do not own any non-inherited traditional IRAs.
Each Form 8606 is separate. Line 6 for your owned IRAs and each decedents Inherited IRAs are separately tracked. Do you understand that you only have to file a form 8606 for a decedents Inherited IRAs that have basis (non-deductible contributions)

letsgobobby
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by letsgobobby » Tue May 01, 2018 12:06 am

Spirit Rider wrote:
Mon Apr 30, 2018 11:47 pm
Each Form 8606 is separate. Line 6 for your owned IRAs and each decedents Inherited IRAs are separately tracked. Do you understand that you only have to file a form 8606 for a decedents Inherited IRAs that have basis (non-deductible contributions)
right, I think I have that. But we each have a backdoor Roth IRA (2 8606s) and I have one inherited IRA with basis (3rd 8606) and another inherited IRA with no basis (no 8606). Line 6 on the inherited IRA 8606 - do I put the total of all inherited IRAs? I believe the answer is yes, just want to make sure.

The problem I'm having is with TaxAct's questionnaire. It keeps referring to "decedent's" in the singular, so when there are two decedents with their own bequeathed IRAs, I'm not entirely clear if I should combine figures or not. It seems like there is no other rational way to complete 8606.

Furthermore, I don't understand how Form 8606 determines what percentage of RMDs should be taxable. It seems to be that since my mom's IRA had 50% basis and my dad's no basis, that if I fill it in correctly that an amount equal to 50% of my mom's RMD (so $500 in this example) should be taxable, and 50% not taxable. But that is not what it happening. Instead TaxAct is calculating that an amount equal to 75% of my mom's RMD is not taxable.

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FiveK
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by FiveK » Tue May 01, 2018 12:37 am

letsgobobby wrote:
Tue May 01, 2018 12:06 am
right, I think I have that. But we each have a backdoor Roth IRA (2 8606s) and I have one inherited IRA with basis (3rd 8606) and another inherited IRA with no basis (no 8606). Line 6 on each 8606 - do I put the total of all inherited IRAs (which is the total of all my IRAs)? I believe the answer is yes, just want to make sure.
Perhaps think of it this way: you put the total of all IRAs owned by the person to whom the 8606 applies. E.g., for a couple who each needs to file 8606, one line 6 will have the total of one person's IRAs while the other 8606 line 6 will have the total of the other person's IRAs.

For an inherited situation, the 8606 line should have the total of all IRAs inherited from a single person.

You don't want to put the total of all your, your spouse's, and all inherited IRAs on all the 8606 forms. Does that make sense?
The problem I'm having is with TaxAct's questionnaire. It keeps referring to "decedent's" in the singular, so when there are two decedents with their own bequeathed IRAs, I'm not entirely clear if I should combine figures or not. It seems like there is no other rational way to complete 8606.
No, you should not combine them. That's what "file a separate Form 8606 for the IRA from each decedent" is saying.
Furthermore, I don't understand how Form 8606 determines what percentage of RMDs should be taxable. It seems to be that since my mom's IRA had 50% basis and my dad's no basis, that if I fill it in correctly that an amount equal to 50% of my mom's RMD (so $500 in this example) should be taxable, and 50% not taxable. But that is not what it happening. Instead TaxAct is calculating that an amount equal to 75% of my mom's RMD is not taxable.
Difficult to diagnose without seeing the actual numbers for each line of the 8606 in question. Or, at least, a set of numbers that shows the same behavior you see, if you don't want to use actual values.

letsgobobby
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by letsgobobby » Wed May 02, 2018 12:29 pm

Thanks, with your help and some help from others, I see now that TaxAct does not have the ability to recognize inherited IRAs from more than one decedent. It simply does not give the option of including only the year end totals for a single decedent in Line 6 of form 8606.

My plan is to manually complete an 8606 for the inherited IRA with basis, and then enter the result on Form 1040 line 15b as instructed. This will result in changes in my total tax owed, which I will now calculate manually.

Question: Will this one change have an impact on:

- AMT?
- Medicare tax on earnings over $250k?
- NIIT?

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FiveK
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by FiveK » Wed May 02, 2018 12:55 pm

letsgobobby wrote:
Wed May 02, 2018 12:29 pm
Question: Will this one change have an impact on:
- AMT?
- Medicare tax on earnings over $250k?
- NIIT?
AMT? Maybe.
Medicare tax on earnings over $250k? No.
NIIT? Maybe.

Clarification of the maybes depends on all your other income, etc.

ofckrupke
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by ofckrupke » Wed May 02, 2018 1:03 pm

letsgobobby wrote:
Wed May 02, 2018 12:29 pm
Question: Will this one change have an impact on:

- AMT?
- Medicare tax on earnings over $250k?
- NIIT?
Adding some detail to the first response:

AMT: likely. At the very least, line one of form 6251 is transcribed from line 41 form 1040 (AGI less deductions as figured for the regular tax), so numbers carried through form 6251 will differ even if the computed AMT by happenstance doesn't. For example if you were (pre-2018) in the 28% regular bracket and not in any deduction phaseouts, and in the AMT exemption phaseout (kitces bump zone), then every $100 of change in line 15b should produce $28 of additional regular tax and $7 of additional AMT. [OK, the first part of the phaseout is AMT-taxed at 26%, so if you were in that interval the additional AMT would be (1+0.25)*26 - 28 = $4.50.]

Medicare 0.9% surtax: no. It depends solely on earnings income, which hasn't changed.

NIIT: Maybe. If your non-investment income was under $250k before the change, with the investment income straddling the threshold, then a change in the non-investment income (that is, the line 15b change) will change the amount of investment income projecting above the threshold and subject to the surtax, by the same amount. Or if the pre-change non-investment income was over $250k but post-change it's under $250k, then that would cause part of the investment income to slip below the threshold and not be subject to the surtax. [Definition: non-investment income = AGI minus form 8960 line 12 net investment income.]

letsgobobby
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by letsgobobby » Thu May 03, 2018 1:27 am

ofckrupke wrote:
Wed May 02, 2018 1:03 pm
letsgobobby wrote:
Wed May 02, 2018 12:29 pm
Question: Will this one change have an impact on:

- AMT?
- Medicare tax on earnings over $250k?
- NIIT?
Adding some detail to the first response:

AMT: likely. At the very least, line one of form 6251 is transcribed from line 41 form 1040 (AGI less deductions as figured for the regular tax), so numbers carried through form 6251 will differ even if the computed AMT by happenstance doesn't. For example if you were (pre-2018) in the 28% regular bracket and not in any deduction phaseouts, and in the AMT exemption phaseout (kitces bump zone), then every $100 of change in line 15b should produce $28 of additional regular tax and $7 of additional AMT. [OK, the first part of the phaseout is AMT-taxed at 26%, so if you were in that interval the additional AMT would be (1+0.25)*26 - 28 = $4.50.]

Medicare 0.9% surtax: no. It depends solely on earnings income, which hasn't changed.

NIIT: Maybe. If your non-investment income was under $250k before the change, with the investment income straddling the threshold, then a change in the non-investment income (that is, the line 15b change) will change the amount of investment income projecting above the threshold and subject to the surtax, by the same amount. Or if the pre-change non-investment income was over $250k but post-change it's under $250k, then that would cause part of the investment income to slip below the threshold and not be subject to the surtax. [Definition: non-investment income = AGI minus form 8960 line 12 net investment income.]
oh geez. the pain. I had no idea the can of worms I was opening. Form 1116 just about pushed me over the edge.

AMT - changed, but did not change final result

Medicare - no change

NIIT - changed but did not change final result

exemption phaseout, deduction phaseout, From 1116 Foreign tax credit worksheet - all changed, but none changed the final result.

Had to redo the Qualified Dividends and Capital Gain tax worksheet as well. In short I had to redo almost my entire return with the exception of HSA and 8606 forms for my own IRAs, 2441 (child and dependent care), 8889 (HSA), and 8959 (additional Medicare tax).

I do not think it is even worth starting the return in a software program as long as I maintain this basis and keep this IRA. It also does not appear worth paying a preparer a few hundred dollars to do my return; it would be cheaper to just declare this IRA has no basis and pay an additional tax on an additional $500 of income each year (~$150). Or close out the IRA in 2018, do this rigamarole one more time next year, and then be done.

In the end, an additional $273 of income from the IRA resulted in an increase in total tax of $93 (34%). This seems ballpark reasonable and I'm going to go with it unless you think it doesn't make sense.

Lesson to those of you/us leaving traditional IRAs with some basis to future heirs: Do them a favor and convert that now to a Roth. Don't make them go through this.

ofckrupke
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Re: Inherited IRA with basis Form 8606 TaxAct

Post by ofckrupke » Thu May 03, 2018 9:43 am

letsgobobby wrote:
Thu May 03, 2018 1:27 am
In the end, an additional $273 of income from the IRA resulted in an increase in total tax of $93 (34%). This seems ballpark reasonable and I'm going to go with it unless you think it doesn't make sense.
Sounds like either the added income has pushed you $35-45 above the end of the AMT exemption phaseout, or my model has a blind spot,for lack of personal experience, about the way the Pease or PEP limitations, or the FTC in full 1116 glory, interact(ed) with the AMT. Cuz I would have thought the sum of regular and AMT changes should have summed to an even 35% of change in income. You should trust your work though, and ship it as completed. If the IRS figures it as $3 more I think they may also declare that de minimis and tell you not to remit it.

Maybe one of the other software products will handle your IRA menagerie in future. Still, your session of continuing tax education will probably pay off as you meet financial decisions with a renewed intimacy to tax factors.

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