Have you inherited an IRA? Was the decedent’s estate subject to estate tax? If the answer to both questions is yes, chances are you’ve been overpaying tax ever since.
Money withdrawn from an inherited IRA is subject to income tax. However, you can deduct any estate tax already paid on the IRA. Suppose, for example, you inherited a $500,000 IRA. Without that IRA, the estate tax would have been $200,000 less than it actually was.
Thus, your IRA was subject to a 40 percent estate tax ($200,000 tax on a $500,000 asset). Under the tax code, you’re entitled to a 40 percent tax deduction on money you withdraw from that IRA. If you withdraw $40,000, for example, only $24,000 (60 percent) will be subject to tax. This goes on until you’ve deducted the full $200,000.
Unfortunately, many tax pros are not aware of this deduction. If you’re in this situation, check your records: you may be able to amend prior years’ tax returns and get a refund.
