Income Tax Withheld on IRA Payable to Estate

[edrakin]

Client's daughter died in 2024. She had no beneficiary listed on her retirement account, which was worth $740k. It was paid to the Estate in 2024, and she received a 1099 to the Estate showing the income and $222k of tax withheld. Because I am doing a first and final 1041, it produces a k-1 showing all the $740k of income being passed out to the mother (as heir) and a $222k refund to the estate. Is this the proper result? Client will need to wait for that $222k refund and pay a similar amount on her personal return if so. Thanks in advance. 

[BobKamman]

The withholding on the IRA was voluntary, so someone screwed up.  Yes, the refund goes to the estate, but the K-1 from the estate's 1041 should not show more than the actual cash distributed to the mother (the net paid, not the gross).  She pays tax on that now -- she still has the money, right? -- and then on the withholding when it is distributed to her this year.   

[sjrcpa]

On a final return, all income passes out. But as Bob points out, there is still $222K to be collected by the estate and paid to the beneficiary. So this is not a final 1041. Next year will be.

[BobKamman]

It could be that the beneficiary received more than just the IRA money.  For example, there could have been a house, with $500K equity, so the estate distribution was $1 million.  And that would result in the entire IRA distribution being shown as income on the K-1, even though 30% of it (!) was withheld for taxes.  It would show up that way even if the house was distributed "in kind," right?  Beneficiary can file an extension to put off paying until October.  She will be charged 8% interest, but the estate will earn that much on the refund if not paid by June 1.  (Late payment penalty would be abated as "first time," if not for reasonable cause.)  Next time don't listen to the guy who says, "Estates pay high tax rates so better have 30% withheld."

[Accountant-Man]

Should have said, "Estates pay high tax rates so better have distributions made in time."