Hi - Received an IRA distribution.....how much should I set aside for taxes?

Question

Hi - Received $36,395 as an IRA distribution following my father's passing. It was part of his irrevocable trust which then became a revocable trust upon his death. The trust was the beneficiary of his IRA. I am one of the beneficiaries of the trust. I will be receiving a Form 1041, K-1 in early 2009 but would like to know what I should set aside for taxes. Will it just be added to our income and be taxes at our rate or are they extra taxes and penalties to consider. THANKS!

Answer 1

First, as the other answerer noted, it's a revocable trust which became irrevocable on your father's death.  A bit obvious, as he clearly cannot revoke the trust after is death.  But, to continue....

Was an an IRA _distribution_ or did you inherit the IRA?  (Actually, it's a legal question, as I note further down in my answer.)

If a distribution, it's ordinary income.  and you should probably set aside approximately $10,000, and ensure that you meet the "safe harbor" of having at least as much withheld this year as your 2008 taxes.  See 2008 form 1040-ES and instructions for details.

If you inherited the IRA, you had, and may still have, the option of rolling it over to an "inherited IRA".  If he was already required to take distributions, you have to take distributions based on YOUR life expectancy.  If not, it's just like an ordinary IRA, except there's no early withdrawal penalty.

Whether you are considered to have inherited the IRA depends subtly on the structure of the trust, but if the trust was revocable before his death, it's probably considered an inheritance.  

Answer 2

FWIW, you got the legal phrases backwards.  This was a revocable trust until the died (because he could change it); it became irrevocable when he died.

The only tax is the income tax.  There won't be any penalties (except if you fail to make enough estimated tax payments).  It's like getting a bonus for the same amount, so if you are in the 25% tax bracket, it will cost you $9100.  The problem is, we don't know if it will push you into a higher tax bracket or cause you to hit any phaseouts.

Answer 3

to determine your tax bracket - you would add that money to your total earnings for all of 2008 - just to be safe - make and estimated payment to the IRS by Sept 15th for 12000 - not knowing what your other earnings are - this should be a safe amount - you may get some of that back if I over estimated - go to www.irs.gov and look in forms and publications section for a 1040-ES - coupon for the payment. I'm not entirely sure if it's taxable income to you , but if you say you're getting a k-1, then it probably is.