Section 691(c)

The deduction is only available if you itemize and it is part of the miscellaneous deductions which are reduced by 2% of adjusted gross income.

You will have to run the numbers for both alternatives. Technically, you should consider the time value of money in making your final decision.

Good luck.

the deduction if I did use an inherited IRA and took the income over time? In theory I could be a CPA in a year, and should be able to handle these calculations, but I can't find mention of it anywhere; just that its 'complicated'. I would think it would be good to stretch out the claiming of taxable income, but if I can get a 45% deduction this year, compared to nothing over the years because its too complicated to figure, maybe I should take the lump sum.

Wrong. The ETD is NOT subject to the 2% AGI floor. - IRC 67(b)(8).

Also, the OP's assumption that the estate tax attributable to this IRD is simply going to be the estate tax bracket percentage of the IRD is wrong. The computation is alot more complicated than that. Firstly, the estate tax attributable to ALL IRD is the difference between return estate tax and estate tax recomputed by excluding all IRD and all liabilities deductible for income tax purposes per 691(b). For IRD purposes, any post-tax basis (for an IRA, non-deducted contributions) are taken into account. Once the estate tax on all IRD is determined, it is allocated by simple ratio to each IRD item according to its amount. For payments over time, the estate tax is further allocated over the period designated.

Agreed, but also note that as this is an itemized deduction, it is also subject to whether one's total itemized deductions will exceed the standard deduction in future years. Amortizing the ETD isn't the messy part.

text -

"For payments over time, the estate tax is further allocated over the period designated."

But - is this a complicated formula that will be dependant on the amount of the distribution from the inherited IRA, or is it just a straight line percentage based on the number of years I would be getting a distribution?

And the fact that I may not be able to itemize in future years is another point to take into consideration. THIS IS TOO COMPLICATED!!

So - I can ignore the whole mess, just take an inherited IRA and get the tax deferral and tax free growth, or take it all at once and get the misc itemized deduction. The deduction being the amount of tax the estate paid based on the value of the IRA. This should be just asking the lawyer to run the return with out the IRA, (I believe, hope, there are no other IRD items in the estate), and then the difference will be the tax attributed to the IRA. Take what's left and put it into an IRA, or vinyl siding.

Right??

It is a simple formula based on the amount of the distribution as it compares to the amount used in the IRD computation to determine the attributable estate tax. It's not a complicated formula, nor is it based over time. However, as you suggested that the payments would be RMDs, that implies that the ETD would be a fixed number each year as the IRD itself would be fixed.

No. You are still ignoring income-tax-deductible liabilities, as I stated above. Whether you take it in parts or all at once doesn't alter that an ETD is still present. As far as "take what's left ...", you can't put it into another IRA that way. You don't get the rollover option either as the IRA was held by your parent, not your spouse. As noted (in your simplified view), 45% of $20K (which will probably be close to the correct number) is $9k, and if you're single, that by itself exceeds your standard deduction if distributed in a single year.

If you screw it up, don't worry - the IRS really doesn't understand this either. I've had audits where the item was an issue and some ended up as: "What's this?" "Turn to Section 691 in the IRC." "Oh." (issue done). Office audit especially doesn't even know where to start in doing the computation. I've had other audits where they've disallowed it because they don't understand it at all, just for me to get it back in appeals. The last time, the case was already docketed, and IRS district counsel (I guess they're called "local counsel" now) actually referred it to an estate and gift revenue agent group (usually GS-13's), and 3 weeks later they suggested that DC concede the issue as correct.

Lastly, note: Some states don't allow the ETD deduction - or substitute the state inheritance tax amount for the federal amount.

Yes, the IRD is fixed, in my example $20,000. Yes, the ETD is fixed at $9000 in my overly simplified example. That number can be determined. If I take the 20K this year, I get $9k itemized misc deduction.

If I put the 20K into a inherited IRA, and would take just the RMD each year, how do I allocate the $9k over the years? I assume the IRS tables will tell me how many years I have to drain the IRA. Do I just take a straight line proportion each year, or will it be based on the RMD, which I know would vary each year based on investments?

Thank you for all your help, I am trying to learn this stuff.

1) The $20K is ALREADY in an inherited IRA, so what do you mean by "withdraw and put it into...?" 2) The ETD is based on how much of the IRA you actually withdraw each year. It is NOT S/L'ed unless that's what you did with the amount actually withdrawn.

1. You're correct, that was a bad choice of wording for me. I can close the inherited IRA and take the cash. That would give me a 9K misc deduction all at once. And, at that point I would have the cash to put into a Roth IRA. Totally seperate, unlinked transaction, but that is what I would probably do with the money. I'm not making enough on my own right now to contribute to an IRA, but if the money became available, that's what I would do with it.
2. And what is the formula that is used, based on withdrawals? If I withdrawal 10% of the IRA, do I use up 10% of the 9K deduction I have available? And the next year, if I withdraw 15%, I use 15% of the remaining deduction? That seems like a reasonable approach, but I haven't been able to find the formula in the tax code.