Question

Carlie (28) is the beneficiary of her deceased grandmother's traditional IRA. She received a form 1099-R reporting the $10,000 gross distribution. The form had distribution code "4" in box 7, indicating that the distribution is due to death. What is the tax consequence of this distribution?

A. The entire amount is tax-free and penalty-free.

B. The only tax to which Carlie is subject is the 10% additional tax on early distributions.

C. The gross distributions is taxable income, but Carlie may claim an exemption from the 10% additional tax on early distributions.

D. The gross distributions is taxable income, and in addition, Carlie is subject to a 10% additional tax on early distributions.

Answer 1

The Gross distribtion is taxable income, but Carlie may claim an exemption from the 10% additional tax on early distributions.

Explanation

Per IRS, the distribution from IRA to the beneficiary is taxable and hence is included in income. However, the 10% distribution penalty is generally not applicable in such cases.

Option A is incorrect as as there are taxes applicable on income.

Opiton B is incorrect as this distribution is included in income of Carlie and fully taxable.

Option D is incorrect as Carlie is not subject to 10% additional tax.

Hence, C is the correct answer.