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How Much of My IRA Distribution is Taxable?

By January 13, 2011

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taxesDid you take money out of your IRA during 2010? When you take money out of an IRA, part, if not all, is almost always taxable.  (The rare exception is an IRA funded primarily with non-deductible contributions which has sustained an overall loss. Let's hope that highly unusual situation never happens to you.)   Determining how much of your distribution is taxable is not for the faint of heart.   It requires the tracking of basis each year. Basis is created every time you make a non-deductible contribution to your IRA by completing Form 8606.  When you take a distribution from an IRA, you'll receive a Form 1099-R from your custodian indicating the amount of your distribution.  However, the taxable amount will often not be determined, leaving the important tax calculation for you - or your tax preparer-- to perform.

Look at your most recent Form 8606 to find your basis.  Review the value of your IRA as of December 31, 2010.   Divide the basis by the value to determine the non-taxable percentage of your distribution.  Multiply this percentage by the amount of the distribution to find out the non-taxable portion of the distribution. Subtract the non-taxable portion from the total portion to find the taxable portion. Put the total distribution on line 15a and the taxable portion on line 15b of your tax return.

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