Reply To: QCD and estate tax deduction

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Alan S.

You are correct. Had you used the Pub 559 formula from the start, you would have larger estate tax deductions each year, but more of that deduction would have offset your taxable income in lower brackets. A lower annual deduction is less likely to be applied to these lower brackets. Therefore, perhaps you just stay with your current method for consistency, even though it generates a lower deduction (and will therefore last more years) than the correct method in Pub 559.

Re your last paragraph – yes you definitely cannot increase the total IRD above the amount you inherited, because that figure is limited by the estate tax return of the decedent. However, the FIFO theory is that the first dollars distributed from your inherited IRA do not have to be apportioned in some manner between subsequent investment gains and the original IRD amount, so you can treat your distribution as all IRD until the entire amount of IRD is applied to generate an estate tax deduction. This will accelerate the distribution of the IRD and in turn accelerate the estate tax deduction, but it will not increase the total amount of IRD or estate tax deduction available. Again, any apportionment or FIFO decision is based on the opinion of tax experts since no specific IRS guidance on these issues has been issued.

Nor has there been direct guidance on QCD adjustments to the formula. Note that reducing the amount distributed by the QCD would have the same effect as if you inherited an IRA with basis from non deductible contributions (Form 8606 would be used to report the distribution), any IRA basis would be inherited by you. Conversely, a QCD is applied solely by you to reduce the taxable amount distributed. Not clear if the IRS would perceive some distinction between the QCD and inherited basis.