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

  1. 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 >>
  2. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  3. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  4. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
  5. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
  6. Are 401(k) rollovers taxable?

    401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>
Related Articles
  1. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  2. Retirement

    5 Secrets You Didn’t Know About Traditional IRAs

    A traditional IRA gives you complete control over your contributions, and offers a nice complement to an employer-provided savings plan.
  3. Retirement

    Using Your IRA to Invest in Property

    Explain how to use an IRA account to buy investment property.
  4. Retirement

    How a 401(k) Works After Retirement

    Find out how your 401(k) works after you retire, including when you are required to begin taking distributions and the tax impact of your withdrawals.
  5. Retirement

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  6. Retirement

    Retirement Tips for Doctors

    Learn five tips that can help physicians get back on schedule in terms of making financial preparations they need to retire.
  7. Investing Basics

    Do You Need More Than One Financial Advisor?

    Using more than one financial advisor for money management has its pros and cons.
  8. Taxes

    How & Where to File Form 1040 (And Which Version)

    All taxpayers need to know three things when filing a 1040: which form to use, how to file and where to file. After reading this, you'll know all three.
  9. Savings

    Should You Look at 529 Plans Outside Your State?

    529 savings plans are not restricted by geography. So if your in-state offering has high fees or poor investment choices, look elsewhere.
  10. Taxes

    The Purpose Of The W-9 Form

    The W-9 form provides key data your clients need if you're an independent contractor. Just be sure you're not really an employee who should fill out a W-4.
  1. Taxes

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

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

    A consumption tax imposed by the government on the sale of goods ...
  4. Fiduciary

    A fiduciary is a person who acts on behalf of another person, ...
  5. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. ...
  6. Duty Free

    Goods that international travelers can purchase without paying ...

You May Also Like

Trading Center