Taxation of an RMD from an IRA in the year of the owner’s death

My question has to do with the taxation of an RMD for the year of the IRA owners death. If the IRA owner is over age 701/2 so he or she is in RMD status and they are deceased before they have taken their RMD for the year of death it is my understanding that the RMD must be taken (paid to) the designated beneficiary. If the designated beneficiary is the IRA owner’s daughter (not their spouse or estate) I believe the RMD should be paid to the daughter before December 31 of the year of the IRA owner’s death. I have always assumed that the RMD for the year of death is taxable to the beneficiary who receives it (the daughter in this case) because they receive it. I assume that the IRA custodian will issue the Form 1099R to the daughter (beneficiary) using her SSN. On two occasions I have seen opinions indicating that the IRA owner (the deceased) in this case is taxed on the RMD for the year of death that was paid to the beneficiary. This does not seem correct to me because the deceased IRA owner’s tax year cuts off at the date of death and he or she has not received the RMD before death. Am I correct in that the RMD that was psid to the deceased beneficiary’s daughter in my example is taxable to her and not the deceased or am I missing something here?
Thanks for your help,
Richard H. Wetter, CPA



Richard, you are correct. If the IRA owner passed on or after their required beginning date (4/1 following year they reached 70.5) and did not withdraw the year of death RMD before passing, the decedent is no longer responsible for completing the RMD. The beneficiary should take the RMD by 12/31 of that year and the 1099R will be issued to the beneficiary under the beneficiary’s SSN, and is reported on the beneficiary’s tax return. Quite often, this RMD is not completed by 12/31 particularly for deaths occcuring late in the year. In that case, the beneficiary should withdraw the RMD in the following year and  file Form 5329 for the year of death requesting waiver of the 50% penalty for reasonable cause (see 5329 Inst) and the IRS will almost certainly waive the penalty. The distribution will be taxable in the year actually distributed. Had there been two children designated as beneficiaries in this situation, the year of death RMD can be satisfied in any combination by the two beneficiaries.



can the bene claim some type of credit to offset the extra income they have to take as the RMD, either on their own taxes or relating to the estate?



For huge estates of decedents that pay federal estate taxes, an IRD deduction would be available to a beneficiary that receives previously non taxed income from the decedent. This is a misc itemized deduction that still applies because it is NOT reduced by 2% of AGI. However, the estate tax exemptions are no so high that very few estates pay federal estate taxes. State estate or inheritance taxes do not qualify for this IRD deduction.



but besides the IRD, there is no provision for the inheritor to offset their tax bill for the added income, right?



If the beneficiary is not maxing out all contribution opportunities to retirement plans, they could use the RMD money to increase these other contributions. For example, more contributions to a 401k would offset the taxable income from the RMD. 



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