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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29580
Experience:  Taxes, Immigration, Labor Relations
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I received a $15,000 distribution from my deceased mothers

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I received a $15,000 distribution from my deceased mother's IRA in 2012. Form 1099R box 1 shows $15,000; box 2a shows $15,000; box 2b the "taxable amount not determined" box is checked. The distribution code is 4, for Death. (I was 59 1/2 when I received this distribution in 2012.)

What percentage of the $15,000 that I received is taxable? How do I include it on my 1040? As income from IRA distributions on item 15a? What would the taxable amount be for item 15b?

Lev :

Hi and welcome to our site!
Because that was distribution of inherited IRS due to the death of the original owner - there is no early distribution penalty regardless of your age. That is based on the distribution code reported in box 7.

Lev :

box 2a shows $15,000; box 2b the "taxable amount not determined" box is checked - these reporting are contradicting. In general - the full amount of distribution is considered as taxable unless your mother made any after tax (not deductible) contributions into that IRA account.
If all contributions were deducted - the full amount is taxable.

Customer: Thanks, Lev. I realize there is no penalty for the distribution, but what portion of the $15,000 must I use to calculate my income? That is, do I pay taxes on the entire $15,000 which I must report as additional income?
Customer: OK, thanks, Lev. I didn't wait LNG enough to see the second half of your answer.
Lev :

How do I include it on my 1040? As income from IRA distributions on item 15a? What would the taxable amount be for item 15b?
On form 1040 - you need to report
line 15a - from 1099R box 1
line 15b - from 1099R box 2a
line 62 - from 1099R box 4 - that how the amount of tax withheld is credited!

Customer: Sadly, no tax was withheld, so I'll owe the full amount, based on my own taxation level.
Lev :

What percentage of the $15,000 that I received is taxable?
Based on your information - the total amount is taxable.
Some income received by the estate or beneficiaries AFTER the decedent passed away might be classified as Income in Respect of the Decedent (IRD) - and could be taxable. Examples of IRD include interest and dividends paid to the estate AFTER the date of death, distributions from tax deferred accounts (401k, IRA, annuity, etc), gain from the sale of inherited assets. Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent.
Because you are the beneficiary who received that distribution - it is taxable for you.Your tax liability is not determined separately for each type of income. That distribution is added to your other taxable income - and will be based on your total income, filing status, deductions, etc.

Lev :

I will help you to estimate your possible tax liability if needed.

Customer: No, thanks for your help, but this was the one remaining detail I hadn't yet determined. The rest of my return is very simple, as I am a federal employee ( currently on furlough, thanks to our friends in Congress!), with very basic deductions for mortgage and charitable giving. This issue - the distribution -- was my only question. Thanks for your help. I'm afraid I got the answer I was expecting, but wanted to check with an expert to make sure.
Lev :

Sorry if you expected differently.
You had a choice to spread distribution over several years - but as long as you already received it - it might be too late for planing. But that is not a large additional income - so additional tax liability should not be too large.
Also "our friends in Congress" are helping to avoid higher tax bracket...

Customer: True! Thanks again for your help!
Lev :

You are welcome.
Please be sure to come back for all your tax related issues.

Customer: Oh, Lev, I have one more question!
Lev :

Sure - go ahead

Customer: I was late by a few days in applying for a 6-month extension, and so the IRS denied my request. Obviously, I waited until 10/15 anyway, as is my wont. I presume they'll hit me with a penalty of some sort. Any idea how large it might be? A percentage of my total tax? (I'll owe them about $5,000)
Lev :

As you already late - 10/15 would not be relevant for you.
The penalty is based on the amount of tax you owe. A failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline. The failure-to-file penalty is generally more than the failure-to-pay penalty.

Lev :

The penalty for filing late is normally 5% of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25% of your unpaid taxes.
So - because you are six month late - your failure-to-file penalty is max 25%.

Customer: Anything I might to to ameliorate the penalty? Write them a letter, begging their forbearance?
Lev :

There will not be any failure-to-pay penalty because of the 25% limit. However - there will be interest charges.

You will not have to pay a penalty if you can show reasonable cause for not filing or paying on time.

Customer: Hmmmmmmmm....... Guess I'll have to make something up!
Lev :

The best path forward might be to ask the IRS to abate penalties, however it would be very unlikely that interest charges are abated. File a form 843 -
to request the "accuracy related penalty" be abate based on reasonable cause. If you provide the reason like "I forgot" - I do not think it will be considered as reasonable - so be careful when prepare an abatement request. Because that was not your mistake - but the mistake of your CPA - you have a good chance to provide a reasonable cause.
Here are instructions -
If the IRS accepts your reasons as reasonable - and agrees to abate penalties - at least part of the issue would be resolved.

Customer: Great advice! Thanks so much. Fingers crossed.
Lev :

Yes - filing a valid extension could be very helpful,,,

Customer: It's the first time I missed the April 15 deadline. Believe me, I won't be doing THAT again! Once again, thanks for your help.
Lev :

Sorry for your situation. I think you have nothing to loose if apply for abatement - but be careful with your reasons.

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