The simple answer is no, but it’s never simple with the IRS.
Question: My husband died in September 2018. We had borrowed from his 403(b) a few years ago. I used the money we still had in our bank account to pay for the funeral costs and the cost to pay his personal debts (like a car loan). Then I received a 1099R form for the amount that was rolled over into my account. I also received a 1099R for the amount that was outstanding on the loan from the 403b. How much of the money can I claim as being used for his death? I’m assuming that the funeral costs qualify. Can I also claim the amount that was used to pay off his personal debt as being used for his death? – Casey in California
Jacob Dayan, Co-Founder of Community Tax, responds…
Sorry for your loss, Casey.
Generally, beneficiary spouses can roll over the eligible distribution attributable to the employee to any eligible retirement plan. This would most likely be your existing or a new IRA rollover account. You had previously taken a loan from the 403(b) that appears to be unpaid at his death, and the unpaid balance of the loan was treated as a taxable distribution. The amount of the unpaid loan will be reported on a 1099R form, with the taxable amount shown in Box 2A. There should also be a code “L” reported in box 7, identifying the distribution as a loan.
Any other distributions you received will also be reported on a 1099R – even the amounts that you rolled over. There are two types of rollovers that can be reported on the 1099R.
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The first type is known as a “trustee to trustee” rollover. This happens when funds are sent directly to the rollover trustee without you having received the funds. Then, the second type of rollover involves your receipt of the funds. The rolled over funds must then be deposited into the new account within 60 days of receipt.
The amount rolled over will be reported on line 16A of your 2018 income tax return. Assuming the loan was the only other taxable distribution, the loan amount will be reported on line 16B as taxable income.
Now that funds have been rolled over, you need to be aware of the “Required Minimum Distribution” rules. Basically, you must begin to take distributions from the rollover by April 1 after you have reached age 70½. Your investment advisor will notify you of the minimum amount you must withdraw each year.
Unfortunately, funeral costs and car loans are not deductible.
You can deduct the final medical bills that you had to pay. This deduction is limited to the amount that exceeds 7.5 percent of your income and is grouped with other allowable itemized deductions: state and local taxes, real estate tax, mortgage interest, and charitable contributions. Don’t forget to add the value of any of his personal belongings that may have been donated to charity.
Should your itemized deductions fall short of the allowable standard deduction, you’re still entitled to a $24,000 to $26,600 standard deduction depending on your age. I know this is a lot to digest, but if you struggle with it, contact a tax pro who can break it down for you. Debt.com can help you find one.
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Published by Debt.com, LLC