IRA cost basis computation

I appreciate any advice the group could give me as I try to complete my deceased parent's final joint tax return.

Each of my parents had a traditional IRA with a cost basis. They each took their RMD from their IRA prior to their deaths in 2022.

After their deaths, each of their IRAs were divided 50/50 and placed into inherited IRAs for their two children. This occurred in October of 2022, and each child received one inherited IRA which had securities and cash which was journaled from each of the original parental IRAs. Thus, the proceeds of each parents IRA were merged together from the heirs point of view.

When doing the 2022 joint tax return for the deceased parents, I need to fill out form 8606 for each parent properly so that the cost basis in the original IRAs are used to reduce the taxable amount of each RMD. The 8606 instructions state that the value of the IRA on Dec 31, 2022 should be used in the basis scaling computation.

In this situation I don't have a way to accurately determine the value of the IRA on Dec 31, 2022. Should I use the value of the IRA on the date in October when it was divided and journaled to the heirs?

Thanks - RPD

Let's take a look at your question about IRA cost basis computation.

First and foremost, I want to express my condolences for your loss. I know that dealing with finances after the passing of a loved one can be overwhelming, but I'm here to help make things easier for you.

Based on the information you've provided, it sounds like you have a bit of a tricky situation on your hands. Form 8606 is used to report nondeductible contributions to traditional IRAs, as well as to compute the taxable portion of any distributions from those IRAs. In your case, you'll need to fill out a separate form 8606 for each parent in order to properly report their RMDs and use the cost basis of their original IRAs to reduce the taxable amount.

The instructions for form 8606 state that the value of the IRA on December 31st of the tax year should be used in the basis scaling computation. However, since the IRAs were divided and journaled to the heirs in October, you don't have an accurate way to determine the value of the IRAs on December 31st.

My advice would be to use the value of the IRAs on the date in October when they were divided and journaled to the heirs. This may not be a perfect solution, but it's the best option you have given the information you have available.

One important thing to keep in mind is that you'll want to make sure that you're following all IRS guidelines and reporting requirements to avoid any potential penalties or legal issues down the line. If you're unsure about any part of the process, it's always a good idea to consult with a professional tax advisor.

In summary, when it comes to computing the cost basis for your deceased parent's traditional IRAs, it's best to use the value of the IRAs on the date in October when they were divided and journaled to the heirs, since you don't have an accurate way to determine their value on December 31st. And remember, it's always important to follow IRS guidelines and seek professional advice if you're unsure about any part of the process.