non-spouse inherited Roth IRA distribution

[Janitor Bob]

Client inherited a Roth IRA from her father who passed away in October 2013.  Received total distribution in 2014 (1099-R Dist. Code T)...why does ATX think this is taxable?  What am I missing?  Account was older than 5 years at date of father's death

[kcjenkins]

On the 8606, did you enter her inherited basis?  

[Jack from Ohio]

On the 8606, did you enter her inherited basis?  

What she said!!

[jklcpa]

Code T indicates that the preparer of the 1099R was not sure if the 5-year holding period was met.  Agree about the 8606, but read the instructions for line 19 to see if the distribution should be included there. There is an exception for death and if there were contributions made to the Roth between 1998 and 2009.

Edited February 20, 2015 by jklcpa
added about line 19

[Janitor Bob]

Thanks.  After posting, I found the spot on the 8606 to enter the inherited basis....That is what I was missing.  I have the client contacting the bank today to verify the holding period and detailing what (if any) contributions were made....her subsequent messages to me are leaving me skeptical that the holding period meets the 5-year requirement.

 

This client also took a complete cash distribution from non-spouse inherited IRA of $87,000. Client used the distributions to buy a new car and put a down-payment on a new house.

 

That additional AGI made her ineligible for EIC and AOC for her daughter's education expenses...which she would have been eligible for had she not taken these distributions.

 

She was shocked and upset when I told her she owed appox. $10,000 in taxes (and another $3,000 to Ohio) instead of getting the $3400 refund she got last year.  I reminded her that she is lucky she lives in an "earned Income Only" school district or she would have owed them too.

 

I'm so sick of clients doing things with no regard for the tax consequences...not asking me, then getting upset when I deliver bad news.

 

I need scotch....lots of scotch