Tax Reporting Forms for Inheritance From an IRA

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When a person dies, his individual retirement accounts, IRAs, will go to the beneficiaries he has designated. How the money is treated depends on many different factors, including the type of the IRA involved, the relationship of the beneficiary to the deceased, the age of the account, when the money is received by the beneficiary and what the beneficiary chooses to do with it. In most cases the money will need to be reported as income for the year in which is it received, though there are exceptions to this rule.

Traditional IRAs

An IRA will be characterized in the same way for the beneficiary of an estate as it is for the estate. This means that any distributions from traditional IRAs are treated as taxable income. These must be reported on the beneficiary’s Form 1040 along with all other sources of income. Required distributions must be reported in the year the distribution is required to be made, even if it does not occur in that year.

Roth IRAs

The IRS mandates that an inherited IRA be treated by the beneficiaries the same as it is treated by the estate, which means that funds that are non-taxable as part of the estate are also non-taxable income for the beneficiaries. Typically both the amount of the original contributions and any income made by the Roth IRA investments will not be taxable, but there are exceptions, particularly if the plan has not been in place for at least 5 years before money is removed. This can trigger taxes on the earnings portion of distributions, and that taxable income must be reported on Form 1040 by the beneficiaries.

Notice to Beneficiary

Notice of income from an IRA is given by the estate’s representative to the beneficiary on a Schedule K-1. This form is filed as part of the estate’s tax return, along with Schedule 1041, by the representative. The copy received by the beneficiary is not to be filed with his taxes but should be kept for future reference. It will tell the new owner the total amount of the distribution and what his portion of it was taxable. This is the amount the beneficiary reports as income for that year on form 1040 .

Changes to the IRA

If the beneficiary wishes to treat the IRA funds differently than the estate is treating them, she needs to file a Form 8082, “Notice of Inconsistent Treatment or Administrative Adjustment Request, AAR,” when she files her regular tax return. This lets the IRS know of any changes, which will be accepted as long as they are legal. If the form is not filed, the IRS will assess taxes and penalties triggered by the change in handling of the IRA money.