Consider this possible scenario:
==========
A taxpayer has a traditional IRA some 30-40 years ago, consisting
solely of a one-year certificate of deposit, funded by a deductible contribution to that IRA. On the advice of the IRA's custodian, the
taxpayer included interest from that CD in taxable income, paid tax
on it, and included a form 8606 with the return. By the time the
taxpayer discovered that the advice was erroneous, it was too late to
amend the return and exclude that interest from income. No other
events over the years caused a change to the basis.
Now suppose, decades later, that the amount of that interest is
less than 1% the value of the IRA, so more than 99% of the amount of
any withdrawal is taxable. Accounting for nondeductible contributions
is a pain, and the taxpayer might think it was not worth saving a few dollars.
==========
Can the taxpayer simply declare the entire withdrawal as taxable
income and pay tax on it, ignoring the basis? Though that would
technically be an inaccurate return, are there any circumstances
where this could create a problem? (And if it does, is the worst-case scenario that the IRS would insist the basis be considered, which
would lead to a refund of a few dollars of tax?)
--
Stan Brown, Tehachapi, California, USA https://BrownMath.com/ https://OakRoadSystems.com/
Shikata ga nai...
--
On Saturday, October 16, 2021 at 7:31:29 PM UTC-4, Stan Brown wrote:not deductible, you need to determine the amount of basis included in any distribution.
Consider this possible scenario:
==========
A taxpayer has a traditional IRA some 30-40 years ago, consisting
solely of a one-year certificate of deposit, funded by a deductible contribution to that IRA. On the advice of the IRA's custodian, the taxpayer included interest from that CD in taxable income, paid tax
on it, and included a form 8606 with the return. By the time the
taxpayer discovered that the advice was erroneous, it was too late to
amend the return and exclude that interest from income. No other
events over the years caused a change to the basis.
Now suppose, decades later, that the amount of that interest is
less than 1% the value of the IRA, so more than 99% of the amount of
any withdrawal is taxable. Accounting for nondeductible contributions
is a pain, and the taxpayer might think it was not worth saving a few dollars.
==========
Can the taxpayer simply declare the entire withdrawal as taxable
income and pay tax on it, ignoring the basis? Though that would
technically be an inaccurate return, are there any circumstances
where this could create a problem? (And if it does, is the worst-case scenario that the IRS would insist the basis be considered, which
would lead to a refund of a few dollars of tax?)
The fact that some of the interest was reported incorrectly as income and tax was paid has no impact on current distributions from the IRA. If the contributions were tax deductible, then 100% of the distributions are taxable. If the contributions were
On Sun, 17 Oct 2021 00:50:53 EDT, ira smilovitz wrote:were not deductible, you need to determine the amount of basis included in any distribution.
On Saturday, October 16, 2021 at 7:31:29 PM UTC-4, Stan Brown wrote:
Consider this possible scenario:
==========
A taxpayer has a traditional IRA some 30-40 years ago, consisting
solely of a one-year certificate of deposit, funded by a deductible contribution to that IRA. On the advice of the IRA's custodian, the taxpayer included interest from that CD in taxable income, paid tax
on it, and included a form 8606 with the return. By the time the
taxpayer discovered that the advice was erroneous, it was too late to amend the return and exclude that interest from income. No other
events over the years caused a change to the basis.
Now suppose, decades later, that the amount of that interest is
less than 1% the value of the IRA, so more than 99% of the amount of
any withdrawal is taxable. Accounting for nondeductible contributions
is a pain, and the taxpayer might think it was not worth saving a few dollars.
==========
Can the taxpayer simply declare the entire withdrawal as taxableThe fact that some of the interest was reported incorrectly as income and tax was paid has no impact on current distributions from the IRA. If the contributions were tax deductible, then 100% of the distributions are taxable. If the contributions
income and pay tax on it, ignoring the basis? Though that would technically be an inaccurate return, are there any circumstances
where this could create a problem? (And if it does, is the worst-case scenario that the IRS would insist the basis be considered, which
would lead to a refund of a few dollars of tax?)
Ira, can you clarify please? Are you saying that, since the interest
paid into the IRA was not subject to tax at that time, the fact that
it was declared as taxable income and tax paid on it at that time is irrelevant, and in fact the basis in the IRA is zero?
--
Stan Brown, Tehachapi, California, USA https://BrownMath.com/ https://OakRoadSystems.com/
Shikata ga nai...
--
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