Reply To: QCD and estate tax deduction

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Alan S.

Yes, it appears that your calculation understates the IRD deduction you have been entitled to for each year. Kitces’ FIFO method means that gains in the IRA that result in a larger distribution can still be treated as IRD, but only until the full IRD deduction has been recovered, which you actually might have fully recovered by now. With only a 23,228 annual IRD deduction, by the time the IRA is drained (another 3 years) you will only have recovered about half of the total deduction.

Therefore, if you continue as is you will end up losing half the deduction. If you change methods now (or decide to amend 2016-2018) there is a chance the IRS could disallow the additional deduction you should have claimed for the first 12 years instead of allowing you to carry it forward. However, I would discount that possibility and amend those returns for a sizeable refund. The deduction will vary somewhat each year relative to the gross amount you distributed.

Therefore, in very rough numbers if you recovered 23,000 for 12 years, that is around 276,000. For 2016-2019 if you average 95,000 per year that would bring your total to 656,000 recovered through 2019. The remaining amount of 220,000 (876,000-656,000) would nearly be fully recovered in 2020 and 2021.

NOTE: I am assuming that the 381,000 “original estate tax deduction” (the one time determination) is correct. That figure should be the difference between the estate tax actually paid by the decedent less the estate tax the decedent WOULD HAVE paid had the inherited IRA not been included in the estate tax calculation. So this figure should be the estate tax attributed to your inherited IRA. I would be sure that figure is correct since it is the amount multiplied by the fraction each year since you started.

It is fortunate that misc deductions NOT subject to the 2% AGI floor like the IRD deduction are still available.

Obviously, recovery of your full IRD deduction over the remaining 3 years is a much larger issue than the minor affect of a small QCD. You probably should still NOT include the QCD amount in the 2019 calculation of your IRD Deduction. And of course for 2019 you would need to correctly report the QCD on line 4a and 4b to eliminate it from taxable income. The 1099R will include the QCD, so you need to subtract it on line 4.