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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22773
Experience:  Taxes, Immigration, Labor Relations
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Taxes related to brother (55) passing in IL

Resolved Question:

Hello,


 


My brother (55) unexpectedly passed last May in Illinois. He had a 'small estate' situation assets less than $100K, so no probate required. I was in the process of disposing his liabilities and found that he bequeathed a 401K to me (~$240K, his only brother).


 


From my research (http://www.nolo.com/legal-encyclopedia/illinois-probate-an-overview.html) assets subject to a beneficiary designation does pass through probate either. I reside in CO. The company 401K administrator is awaiting my distribution plans.


 


Ok, here are the some tax questions and scenarios:


 


A) I plan to roll-over a portion to my IRA, then take the remainder as cash-out. The rollover is T/F, but the cash-out would declared on my 1040 as a capital gain, yes? Plus 10% penalty?


 


B) Can I rollover a portion of the 401K to someone else? Or can I transfer via a rollover to another party from my IRA account?


 


C) I plan on selling my house soon and could sell it at a loss to help offset the tax penalty of the cash-out net? eg: Would the taxes on $100K cash at 23% be offset-ed from a $100K declared loss on a sale of house?


 


C-ALT) A little clarity on the selling of a house here as related to taxes; A 'loss' is considered the difference from sale price to original purchase price OR is a 'loss' considered the difference from sale price to appraised (market) price?


 


D) My brother was essentially indigent living on his savings until his passing. We figure the 401K was his 'backstop' with the required distribution date soon to arrive. From what I have found, he had not filed taxes for as many as 10 years. Do I need to file for him this year? Considering the 401K distribution or since there was no probate is this academic?


 


Thanks in advance, T

Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
1.
You may not roll-over inherited 401k plan to your own IRA - that option is ONLY available for spouses. You may however roll it over to specially titles "inherited IRA" - and spread distribution over several years.
The distribution will be reported as your taxable income. It is not taxed as a capital gain - but rather as ordinary income.
There is no 10% penalty for distributions from inherited tax deferred accounts.

LEV :

2.
You may not rollover fund from the inherited 401K account to another person.
You may however disclaim inheritance - in this case the 401k account would be probated as part of the estate - and will be inherited by other beneficiaries.
3.
If that is your personal house - not rental property - the loss is classified as a personal loss - and may not be deducted on your tax return. Sorry if you expected differently.
You may only deduct a loss if the asset is your business or income producing property.
The loss is calculated as (selling price) MINUS (basis)
The basis is your original purchase price (assuming the property was purchased) and it should be adjusted by purchase and selling expenses and also by improvement expenses.

LEV :

4.
As an executor of your brother's estate - you are required to handle all tax related issues.
If he was required to file tax returns for these years - you need to prepare these tax return and pay any tax liability. But if tax returns were not required - you do not need to file.
Filing requirements are generally based on gross income. Assuming he was single - in 2012 tax return was required if his income was above $9750.
Only his income BEFORE he died should be considered.
Distributions from 401k AFTER his death are not considered his income - and are reported on the tax return of his estate or by beneficiaries.
Let me know if any help or clarification needed.

Customer:

I printed, please allow me time to 'digest' and reply. Thks so far. T

LEV :

Sure - take your time.
You may always access our conversation later and ask additional questions.

LEV :

Here is the address on this page - http://www.justanswer.com/tax/7v6yn-taxes-related-brother-55-passing-il.html
S
ave it for future reference.

Customer:

Thank you, XXXXX XXXXX concise and detailed answers -- all your assumptions were correct and on target.

Customer:

Much appreciated, do you have any referrals for a financial planner / tax consultant in the Denver area?

LEV :

Unfortunately I may not provide any specific references, however your situation is not complicated and any any financial specialist would be able to handle.
In additional - you might want to review this publication -
http://www.schwabcdn.com/cms/P-1625576.3/CS13416-02_MKT13598-10_FINAL_118091.pdf
which provides more detailed explanation of all your options.

LEV :

When the money were contributed into 401k plan - they were not taxed - however - when the money are distributed - that is your taxable income - for 401k distribution - you should receive a form 1099R.
You will report on form 1040 as following:
line 16a - total distribution - from 1099R box 1
line 16b - taxable part of distribution - from 1099R box 2a
line 61 - federal income tax withheld - from 1099R box 4 - that amount will be credited toward your tax liability.
In additional - on form 1099R you may want to verify the distribution code on form 1099R box 7 would be "4" Death - which is an indication that the distribution is NOT subject of 10% penalty.

Customer:

Great resources. Thanks again. Could you recommend financial planner / tax consultant in the Denver area? Or do you have a

Customer:

online service other than this?

LEV :

Unfortunately I may not provide any specific references, however your situation is not complicated and any any financial specialist would be able to handle.
Sorry - rules on this site prevent me from contacting customers outside the site.
If you plan to open an inherited IRA account - you may contact any financial company or your bank to accommodate your request.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22773
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you

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