A Special Deduction

published 15 March 2008

If you withdrew funds in 2007 from a traditional IRA you inherited, you might deserve a special tax deduction. You qualify if the person from whom you inherited the account had an estate large enough to trigger the federal estate tax.

Say you inherited a $50,000 IRA, which, because it was included in your mother's taxable estate, boosted the estate tax bill by $20,500. Although you have to pay tax as you pull money out of the IRA, you also get an income tax deduction for that $20,500.

If you pulled the full $50,000 out in 2005, you get the full deduction on your 2005 return. If you withdrew just $25,000 last year, you deduct just half of the estate tax bill attributable to the IRA: $10,250 in this example.

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This miscellaneous deduction for federal estate tax on "income in respect of a decedent" is taken on line 28 of Schedule A. It is not subject to the 2% rule that limits the deduction of most other miscellaneous expenses.

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McCormally retired in 2018 after more than 40 years at Kiplinger. He joined Kiplinger in 1977 as a reporter specializing in taxes, retirement, credit and other personal finance issues. He is the author and editor of many books, helped develop and improve popular tax-preparation software programs, and has written and appeared in several educational videos. In 2005, he was named Editorial Director of The Kiplinger Washington Editors, responsible for overseeing all of our publications and Web site. At the time, Editor in Chief Knight Kiplinger called McCormally "the watchdog of editorial quality, integrity and fairness in all that we do." In 2015, Kevin was named Chief Content Officer and Senior Vice President.