Confused about Inherited IRA Basis - How to determine basis for taxes

Thanks for explaining! The 1099-R I received does show the full amount as taxable. But does this mean I don't need to worry about figuring out my dad's basis at all? I was stressing because I have no access to his tax records to determine this. Also, should distributions from an inherited IRA be treated differently than regular income for tax purposes? I'm trying to understand if there are any special considerations I need to be aware of.

If your 1099-R shows the full amount as taxable, then you generally don't need to worry about your father's basis. This indicates that either he didn't have any non-deductible contributions or the IRA custodian has determined the taxable amount correctly based on their records. For tax purposes, distributions from an inherited IRA are treated as ordinary income, similar to wages or interest income. They get added to your other income sources and taxed at your applicable tax rates. There's no special tax rate, but these distributions aren't subject to the 10% early withdrawal penalty that would normally apply to IRA distributions taken before age 59½.

How exactly does this work? Do you just upload documents and it figures everything out? I inherited an IRA from my uncle last year and I'm completely overwhelmed with the tax implications.

I'm skeptical about trusting AI with something this important... did you verify the information it gave you with an actual tax professional? These inheritance tax situations can get really complicated.

You upload relevant tax documents and the AI analyzes them based on current tax laws. It identified which distribution rules applied to my inherited IRA based on my relationship to the deceased and when they passed away. It creates a personalized report explaining everything in plain English. I actually did take the report to my accountant, and she was impressed with how accurate it was. She said it correctly identified that I fell under the 10-year rule rather than the old "stretch IRA" provisions since my mom passed after the SECURE Act took effect. The tool basically did the research that would have cost me hundreds in billable hours.

Wait, how does this service actually get you through to the IRS? I've been calling for months about an inherited IRA issue and just get disconnected after being on hold forever.

Yeah right... nothing gets you through to the IRS these days. I filed amended returns for my inherited IRA issues and I'm still waiting for them to process it 14 months later. No way this actually works as claimed.

The service uses a combination of technology and timing to navigate the IRS phone system. They basically keep calling using an automated system until they secure a place in line, then they call you when they're about to connect with an agent so you don't have to wait on hold. It's like having someone wait in line for you. I was definitely skeptical too, but after months of trying myself with no luck, I was desperate. The IRS agent I spoke with cleared up my inherited IRA distribution confusion in minutes. They confirmed I didn't need to know my father's basis for the traditional IRA since distributions would be taxed as ordinary income to me regardless. They also explained the documentation I needed to keep in case of audit, which was super helpful.

Thank you for this info! Is there any way to confirm whether he made non-deductible contributions if I don't have access to his past tax returns? Would the financial institution where he held the IRA be able to tell me definitively?

The financial institution might have this information, but they don't always track non-deductible contributions reliably. Your best bet would be to contact the IRA custodian and specifically ask if they have records of any non-deductible contributions your father made. If that doesn't work, you could request your father's tax transcripts from the IRS with Form 4506-T as the executor or administrator of his estate. Look specifically for Form 8606 filings, which would indicate non-deductible contributions. If no Form 8606 was ever filed, it's safe to assume all contributions were deductible, making the entire distribution taxable to you.

Actually, this isn't entirely accurate anymore. The IRS clarified the rules in 2022, and if the original owner died after their required beginning date for RMDs, then beneficiaries DO have to take annual RMDs during the 10-year period. It's incredibly confusing.

@NeonNinja is absolutely right - the IRS did issue updated guidance that complicates things. If your father had already started taking required minimum distributions (RMDs) before he passed away, then you would need to continue taking annual RMDs during the 10-year period AND still empty the account by the end of the 10th year. Since your father passed in 2021, you'd need to determine if he had reached his required beginning date (April 1st of the year after he turned 72). If he had started RMDs, this could affect your distribution strategy. The IRA custodian should be able to tell you whether he was subject to RMDs at the time of his death. This is definitely one of those areas where the rules have been changing, so it's worth double-checking your specific situation!

This is really helpful, thank you! I'm relieved to hear that I likely don't need to track down my dad's basis information. My 1099-R does show the full distribution as taxable income, so it sounds like I can just report it as ordinary income on my return. I do have a follow-up question about the 10-year rule you mentioned - since I already took my full distribution in 2022, does that mean I'm completely done with this inherited IRA? Or are there any other ongoing requirements I need to be aware of? I want to make sure I haven't missed anything important for future tax years.

@CosmicCaptain Yes, if you took your full distribution in 2022, you're completely done with that inherited IRA! There are no ongoing requirements since you've already distributed the entire balance. The 10-year rule I mentioned only applies if you had chosen to stretch the distributions over time rather than taking it all at once. Since you took the lump sum distribution, you satisfied all requirements in one go. Just make sure you report that distribution properly on your 2022 tax return as ordinary income, and you're all set. The only thing you might want to keep for your records is the documentation showing it was an inherited IRA distribution (your 1099-R form and any estate documents), just in case the IRS ever has questions during an audit. But as far as ongoing obligations go, you're free and clear!