QCD as part of nonspousal inherited IRA distribution with estate tax deduction

Home Fairmark Forum Retirement Savings and Benefits QCD as part of nonspousal inherited IRA distribution with estate tax deduction

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  • #7955
    wanttoknow
    Participant

    I have a non-spousal inherited IRA, and am entitled to claim an itemized deduction each year for estate tax paid on the IRA. The amount of each year’s deduction is specified by a scheme which was approved by the C.P.A. who assisted with the estate tax return. According to this scheme the estate tax deduction is $23,228 each year, except for the last, when it is $18,578.

    2021 is the last year I will take an RMD from the IRA—i.e. the IRA will be exhausted.

    Although not required, I will take a distribution this year, and am considering doing part of this as a QCD. Many years ago on this forum I was told that the estate tax deduction cannot be taken for a QCD, and I assume that’s still true.

    With a 2020 QCD, would it be acceptable to claim a 2020 estate tax deduction which is proportional to the part of the total distribution which is not “QC”, and then claim a 2021 deduction for ALL of the remaining estate tax?

    Estate tax deduction without QCD:
    $23,228 in 2020 + $18,578 in 2021 = $41,806.

    Estate tax deduction with 2020 QCD which is 40% of IRA distribution:
    $13,936 (60%) in 2020 + $27,870 in 2021 = $41,806.

    #7978
    Alan S.
    Participant

    I think I recall a prior thread a couple years back that questioned how this IRD deduction was being applied, but you wanted to continue the same calculation method you have used in the past, that has not been questioned by the IRS especially in view of the fact that the IRD will be exhausted very soon.

    It is so late in the year and no RMDs are required, why don’t you wait until 2021 to do the QCD which will actually reduce your taxable RMD? Have you calculated your net recovery after taxes using this 2021 QCD scenario with/without a distribution this year?

    Nonetheless, if you do a QCD this year, it seems logical to pro rate the IRD Deduction as you indicated, excluding the QCD portion.

    #7979
    wanttoknow
    Participant

    Alan,

    Concerning your last paragraph: When you say “it seems logical to pro rate the IRD Deduction as you indicated, excluding the QCD portion”, I guess you are referring only to 2020 when I would exclude the QCD portion. ($9,292 – 40% of $23,228)

    But what about 2021, when the deduction would INCLUDE the QCD portion excluded in 2020? ($18,578 + $9,292 = $27,870)

    #7981
    Alan S.
    Participant

    Yes, I was just addressing a QCD in 2020 only. It seems that QCDs may conflict with your IRD deduction. In other words, once the IRA is drained and you have not applied the balance of your IRD deduction due to QCDs, you will lose the remaining IRD deduction. You should do the math and compare the current IRA balance to see how much it exceeds the remaining IRD deduction. You might then want to limit your QCDs to that figure to avoid losing some of the IRD deduction, but of course you do are not required to limit your QCDs other than the 100k limit.

    #7984
    wanttoknow
    Participant

    Ålan,

    I don’t quite understand your sentence: “ . . .once the IRA is drained and you have not applied the balance of your IRD deduction due to QCDs, you will lose the remaining IRD deduction.”

    Based on the following data, is the amount of “the remaining IRD deduction” which you say I will lose $9,292?

    Present balance of IRD (estate tax) deduction: $41,806

    2020 IRD deduction for 2020 distribution with no QCD: $23,228

    Portion of $23,228 attributable to proposed 2020 QCD which is 40% of total distribution: $9,292.

    #7986
    Alan S.
    Participant

    To simplify, your IRD deduction is limited to taxable amounts of the IRD asset, in this case the inherited IRA. If the total balance remaining in the IRA exceeds the remaining IRD deduction, then you can apply the full IRD deduction. If the remaining IRD deduction exceeds the balance in the IRA when the IRA is drained the unused deduction is lost.

    That scenario is unusual, since the IRD deduction starts out much smaller than the asset value. However, if the asset loses much of it’s value or the IRD deduction has not been applied correctly, then it’s possible the IRA gets drained before the deduction is fully applied. QCDs will add to this possibility since they reduce the taxable amount of the IRA distributions.

    You could do the math. Compare the current IRA value with the total remaining deduction (41,806) to see how much room is left for QCDs. Then adjust the QCD amounts accordingly unless the QCD means more to you than being able to apply the entire IRD deduction.

    #7992
    wanttoknow
    Participant

    In my case the remaining IRA (100% taxable) exceeds the $41,806 IRD (estate tax) deduction by a lot because the IRA has enjoyed a lot of capital gain since I inherited it 17 years ago.

    I have done the math, and I don’t see any way in which the QCD I am considering will reduce the taxable IRA balance below the remaining IRD deduction.

    My only question has been whether the $9,292 IRD deduction “lost” for 2020 because of the QCD can then be added to the “normal” $18,578 IRD deduction for 2021. (If so, the IRD deduction would still be much less than the distribution.)

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