Getting Educated About Inheriting an IRA From Your Parent

When my Dad passed away, the lawyers and accountants sorted through his estate determining who got what. I was one of the beneficiaries on his traditional IRA which was held in mutual funds and stocks. Once I took possession of the ‘beneficial' IRA, I got an education.

My accountant told me that I had two choices as to how to get the money out of my father's name and into my own. I could take a lump sum distribution and pay the taxes all at once or I could spread out the monies over 5 years, each year taking 1/5th of the value. In that way my income for each of those 5 years would be increased by the monetary value of only 1/5th of the inheritance, thus not sending my income into a higher than normal tax bracket. This would be a way of minimizing the tax impact of the inheritance.

Option 2 is what I elected to do and each year for 5 years I removed 1/5th of the value and claimed it as income. On my taxes, my very savvy accountant took a deduction of this IRA money each year. And each year, like clockwork, I received a Collection Notice from State Department of Taxation and Finance stating that I ‘have failed to pay the tax liabilities … and have ignored assessments issued for these tax periods' specifically regarding the inherited IRA deduction. They claimed I wasn't entitled to it as I had not reached age 59 ½. Of course I had Penalties added to the amount I owed, just to upset me more.

After many phone calls to and from the State Department of Taxation, it was determined that some action in my favor might be taken if I (or my accountant) sent in a copy of my Dad's death certificate along with an explanation. So here's what my accountant said:

Taxpayer is entitled to the pension and annuity exclusion. This is a distribution of an IRA from the Estate of [Dad], my father. He was 79 years old at the time of his death. According to the instructions to Form IT-201, since the decedent was over 59 ½ years old, the beneficiary may deduct the IRA money as the decedent was entitled to it.

At long last, I was reprieved with the following explanation from the state office:

Since you received the distribution on behalf of a decedent who met the age requirement, the pension exclusion claimed on line 27 of your income tax return has been allowed.

This was Year 1 of 5 and I didn't receive the notice until 4 years after the tax form was submitted. The important part of this story is yet to come.

I have now gone through this exercise and frustration 4 times with the state. Each year there's a different representative assigned to my case who doesn't know that I have been through this annoyance before. And each representative for the first 3 years required a new death certificate and a new letter from my accountant stating the same thing as before.

This year when I received the Collection Notice and called up the state tax office, I was connected with a lovely man named Gary who researched the information that I told him and found a computerized record of events for the last 3 years. He understood my annoyance and frustration and said the most wonderful thing to me.

I see you've submitted this information 3 times prior to today. I don't think I'll need you to submit the information again. Your notice has been cancelled.

Bless him!And then there's next year still to come…