A:

Many beneficiaries miss out on one of the most significant tax deductions for inherited retirement-plan assets; the income with respect to decedent (IRD) deduction. If you inherited retirement plans assets, check with the person who filed the decedent's estate return, to determine whether the decedent's estate paid federal estate taxes on the retirement account balance. (For more on this subject, see Tax-Saving Advice For IRA Holders.)

As the beneficiary, you may be eligible to offset or reduce any incomes taxes you owe on your distribution of your inherited retirement account, by claiming a deduction for certain taxes paid by the decedent's estate.

For instance, if you inherited a traditional IRA and the decedent's estate paid $100,000 in taxes attributable to the IRA, the taxable amount of the balance you inherit may be reduced by the $100,000. You may even be able to claim the deduction before the estate taxes have been paid. For instance, in Field Service Advice 200011023, the IRS allowed the beneficiary to claim the IRD deduction, even though the decedent's estate had not yet paid the estate taxes.

The IRD is deductible as an itemized deduction on Schedule A of your income tax return. (To read more about deductions, see Which is better for tax deductions, itemization or a standard deduction?)

If you inherited retirement assets, be sure to work a tax professional who can help you to claim the IRD deduction.

To read more frequently asked tax questions, see How do I avoid paying excess taxes on securities I have sold?, How can I make sure I'm ready to file my taxes?, What aids will help me file my own tax return? and Common Tax Questions Answered.

Question answered by Denise Appleby, CISP, CRC, CRPS, CRSP, APA

RELATED FAQS
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  3. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  4. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  5. Are estate planning fees tax deductible?

    Estate planning fees may be tax deductible, but only if certain conditions have been met. Internal Revenue Service (IRS) ... Read Full Answer >>
  6. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
Related Articles
  1. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
  2. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
  3. Personal Finance

    The Top 6 Books for Estate Planning

    Here are six outstanding books that can help you with your estate planning.
  4. Retirement

    5 Reasons Millennials Lead in Saving for Retirement

    Say what you want to about millennials but the one thing they are doing better than any other generation is saving for retirement. Here's why.
  5. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  6. Estate Planning

    Estate Planning: 16 Things To Do Before You Die

    If you don’t plan your estate, your surviving family may have to deal with disputes and probate that were avoidable.
  7. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  8. Your Practice

    Advisors: $240B in Fees Up for Grabs by 2030

    Advisors have an opportunity to win generational assets over the next 15 years. Here are some tips on how to cater to different demographics.
  9. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  10. Taxes

    Taxes: H&R Block Vs. TurboTax Vs. Jackson Hewitt

    There are more and more tax services to help ease the pain of filing income taxes. Here's our take on three of the biggest.
RELATED TERMS
  1. Fiduciary

    A fiduciary is a person who acts on behalf of another person, ...
  2. Sequence Risk

    The risk of receiving lower or negative returns early in a period ...
  3. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. W-2 Form

    The W-2 form reports an employee's annual wages and the amount ...
  6. Sales Tax

    A consumption tax imposed by the government on the sale of goods ...
Trading Center