A Special Deduction
Don't miss this easily overlooked deduction: estate taxes paid on an inherited traditional IRA.
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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