Basis in Traditional IRA Inheritance? What does it even mean?

The concept of "basis" is basically what you've already paid tax on, so you don't have to pay tax on it again. Let me break this down for an inherited traditional IRA: Most contributions to traditional IRAs are tax-deductible when made, meaning the person who contributed didn't pay taxes on that money. These have zero "basis." However, sometimes people make "nondeductible contributions" (they didn't take a tax deduction when contributing). These contributions create "basis" because tax was already paid on this money. For your inherited IRA, you need to find out if your uncle ever made nondeductible contributions. If he only made regular tax-deductible contributions (which is most common), then there's no basis and distributions will be fully taxable to you as the beneficiary. If he did make nondeductible contributions, you inherit that basis proportionally, which means part of each distribution would be tax-free. The IRS should have records of Form 8606 if your uncle ever filed one to report nondeductible contributions. This would help determine if there's any basis.

After struggling with IRA basis issues similar to yours last year, I found an amazingly helpful tool at https://taxr.ai that saved me from paying double taxes on my inherited IRA. I was completely confused about basis calculations until I uploaded my uncle's old tax documents to taxr.ai and it immediately identified that about 22% of the IRA had basis (meaning it shouldn't be taxed again). Without knowing this, I would have overpaid thousands in taxes! The tool analyzes all the tax documents and tells you exactly what portion has basis and what's fully taxable. It even explains how to report it correctly on your tax return. Super helpful for inherited IRAs where you don't have all the original contribution information.

Just wanted to update after trying the taxr.ai site that was recommended. I uploaded my dad's old tax returns and some statements from his IRA custodian, and it figured out that about $18,500 of his $97,000 IRA had basis from nondeductible contributions he made back in the 90s! I've been paying tax on the full distributions for the past two years. The system generated an amended return form for 2023 that I'm submitting to get back around $4,100 in taxes I shouldn't have paid. It also created documentation explaining the basis calculation that I can keep for future reference. Definitely worth checking out if you're dealing with an inherited IRA!

If you're having trouble getting information about your uncle's IRA basis from the IRS, I highly recommend using Claimyr (https://claimyr.com). I was in the same situation last year with my mom's inherited IRA and couldn't get anyone at the IRS to answer my calls for weeks. Claimyr got me connected to an actual IRS agent in about 15 minutes who was able to look up my mom's past Form 8606 filings and confirm her basis in the IRA. Saved me countless hours of busy signals and hold music! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with was actually super helpful once I got through and explained exactly how to calculate my portion of the basis and how to report it properly on my tax return.

I need to eat some humble pie here. After posting skeptical comments earlier, I decided to try Claimyr anyway because I was desperate to get IRA basis information for my late wife's account before filing taxes. I've been trying to reach the IRS for WEEKS with no luck. Used Claimyr yesterday afternoon, and this morning they connected me with an IRS agent who confirmed my wife had made about $32,000 in nondeductible contributions over the years (she had filed Form 8606 consistently). This means about 25% of each distribution I take will be tax-free. Without this information, I would have overpaid about $7,000 in taxes this year alone. Absolutely worth it and I apologize for my skepticism earlier!

Just want to add that the confusion around basis isn't your fault - it's one of the most confusing concepts in the tax code! I'm an accountant (not a tax pro tho) and still get confused by it sometimes. One tip: if there's no basis info available through the methods others suggested, distributions from inherited traditional IRAs are generally fully taxable at ordinary income rates. This is the default treatment and applies in most cases. Better to assume that than to incorrectly claim basis without documentation.

Mite help to understand WHY basis matters for inherited IRAs. Traditional IRA contributions r usually tax-deductible (pre-tax $$$), so distributions r fully taxable. But if the original owner ever made NON-deductible contributions (after-tax $$$), those amounts shouldnt be taxed again when distributed. The non-deductible portion = "basis". When u inherit, u inherit their basis proportionally. So if 10% of their IRA was basis, 10% of each distribution u take is tax-free.

This is such a helpful thread! I'm dealing with a similar situation with my grandmother's IRA that I inherited last month. Reading through everyone's explanations finally made the "basis" concept click for me. One thing I learned from my tax preparer that might help others: even if you can't find complete documentation about nondeductible contributions, the IRA custodian (like Fidelity, Vanguard, etc.) sometimes has better records than you'd expect. When I called Schwab about my grandmother's account, they were able to pull up contribution records going back 15 years showing which deposits were marked as nondeductible. They couldn't go back to the very beginning of her account from the 1980s, but they had enough info to establish that she'd been making regular nondeductible contributions since 2009 when her income got too high for deductible contributions. This saved me from having to assume everything was taxable. Worth making that call to the custodian before you give up on finding basis information!