Beneficiary 1099-R state tax should go to the decedent's home state or Administrator's home state? Federal rates too high?

[jandrwall_mke]

My brother died without a will in 2021 and I am the "Administrator" of his small (under $estate as well as the sole beneficiary. He lived in MD.  I live in WI, and the mailing address for the EIN I created for his Estate is my home address in WI.

I received a 1099-R for the death distribution from his workplace IRA  (For tax year 2022, since it was not discovered and paid out until over a year after the date of death).  It was paid out to the Estate with my name as Executor (not Administrator, in case that matters) and uses the EIN of the Estate.  It had no federal tax withheld, and 10% withheld for the state of WI.  This brings up a few questions:

Since the deceased lived in MD, is it correct that WI withholding was retained, and do we even owe taxes to the state of WI on that IRA distribution?  Or should the tax have been withheld for and taxes paid to MD?

Secondly, if I fill out a 1041 return for him for the year 2022 just to handle this one taxable distribution, the distribution is being taxed at about 30% because the payee did not provide any taxable amount or capital gains information on the 1099-R that might have reduced the taxable amount of this death distribution.  Does that sound like the correct tax rate? (if I had paid it out in 2021 on his final 1040, it would have been taxed at a rate of about 15-20%.)  On the flip side, by doing a 1041, since the deceased did not live in WI, could I claim a full return on the WI withholding if I file a non-resident WI tax return for the Estate?  Or is that not an option because the Estate's address is my home address in WI?

Instead of a 1041, if I handle this distribution on my own taxes as "nominee income" it looks as if I may pay more like 20% in federal taxes, but I presume I would owe the full amount to WI, and would not need to file any state taxes in MD.  Is that right?

Any suggestions on how this should be handled would be greatly appreciated.

[DianeW777 · Accepted solution]

The retirement is taxable to Wisconsin (WI) because it was received after death by a beneficiary who does not live in Maryland (MD).  The following income is taxable to Maryland (MD) for nonresidents:

• In general, you must file this return if: 
  • • You are a nonresident of Maryland, 
  • • AND, you are required to file a federal return based upon the income levels in Table 1 or 2, 
  • • AND, you received income from sources within Maryland

A Form 1041 can be filed however the distribution would go through the K-1 to the beneficiary.  It would be a final 1041 and no income should be taxed on this return.  You cannot include it on the tax return of the deceased because it was not received before death. 

Your last option is best. You can choose to nominee the information to the beneficiary so that the income is reported to the appropriate person, as it should be, exactly as you have mentioned.  You can choose the nominee action in the tax return or use the steps below.

The nominee action is normal in your situation.  The red copy should go to the IRS, but they won't turn it away if you send a black copy. 

There are steps here for you to review if you choose.

Nominee returns. 

Generally, if you receive a Form 1099 for amounts that actually belong to another person or entity, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received).  You must also furnish a Form 1099 to each of the other owners. 

File the new Form 1099 with Form 1096 (this is a transmittal for the 1099) by mailing to the Internal Revenue Service Center for your area. (Provided on the Form 1096)

• On each new Form 1099, list yourself as the payer and the other owner, as the recipient. On Form 1096, list yourself as the nominee filer, not the original payer.  The nominee is responsible for filing the subsequent Forms 1099 to show the amount allocable to each owner.

The forms filed with the IRS should be the red copy so if you don't have a color printer, go to the IRS website and order the forms here: 

• Form 1096  
• Form 1099-R

[jandrwall_mke]

Thank you for your thorough and speedy reply!

To clarify, it seems that in reading the fine print on the 1096 that I must send that in hardcopy with the 1099, but ONLY those nominee income documents (not my entire tax return).  Am I correct in understanding that I file the red 1099 and 1096 hardcopies without my 1040., and that I file the rest of my return as a separate step? 

If so, it seems that I can then file the 1040 right away, by including a black and white copy of the 1099-R (I do not need to get some sort of response from the IRS that the red 1099/1096 were properly processed before I can file my taxes).  And if I include the copy of the 1099R with my 1040, I can still file electronically?  Or does the entire return need to be sent as hardcopy?

[RobertB4444]

The only thing that needs to be filed with the IRS is the 1099-R and 1096 showing that you are the nominee.  Your return can be submitted electronically separate from the 1099 and 1096.  

You can also file the 1096 and 1099 electronically but that involves purchasing TurboTax Self-employed.  The link is here.

@jandrwall_mke