You have helped me in the past and I hope you can help me now. My aunt passed away earlier this year and I will get an inheritance. Inheritance consists of two parts:
I am somewhat confused by the tax implications of my inheritance. My first question concerns the IRA. I know the rules changed a couple of years ago; therefore I would like to know what my options are. I was thinking of taking the money, which is about $ 85,000, and using it to repay the mortgage. Do you think this is a good strategy?
As for Ford shares, I plan to sell them as soon as I get them. Do I have to pay sales tax?
Thank you, Ted
You are right that tax laws have recently changed regarding the inheritance of the IRA. In 2019, the Security Act was passed, which affected the tax rules regarding inherited IRAs. Under this new legislation, you usually have to liquidate an IRA account within 10 years. This eliminates rules that require minimal distribution from year to year. As long as the IRA is liquidated within 10 years, distributions of any amount may be taken at any time.
When distributions are made from a traditional IRA, the individual receiving the distributions is taxed with that money as ordinary income. Therefore, if you closed the IRA and took a lump sum distribution, you would be taxed at $ 85,000. This could result in a higher tax bracket and potentially disqualify due to certain deductions and loans due to higher income. Therefore, in most situations I would not recommend a lump sum distribution in one year.
I generally recommend a distribution based on your individual tax situation. In other words, take only annually on an annual basis to stay in the same tax bracket.
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Like any other tax law, there are exceptions. The main exception affects the following beneficiaries: the spouse of the IRA owner, an individual not older than 10 years of the IRA owner, the minor child of the IRA owner, persons with disabilities and those who are chronically ill. These users can either follow a ten-year rule or can take advantage of the lifetime allocation rules that were in place before the Safety Act. Unfortunately, in this particular case, the exceptions to the law do not apply.
As for selling Ford shares, you will potentially pay some taxes. Your cost basis for a share is the fair market value of that share at the date of death. Therefore, if you sell a share at a price of $ 14 per share, and on the day of death the value was $ 13 per share, then you would pay tax at $ 1 per share. The sale of shares is subject to capital gains tax, and any capital gain or even losses due to the sale of inherited shares are always considered long-term. You would therefore be taxed at a favorable long-term rate of return on capital.
It is important to remember that when you receive shares that are not from the IRA to inherit, there is no inherited value tax. The only tax consequences are when you sell the shares.
If you do inherit an IRA, it is important to develop a distribution strategy. This will result in lower taxes, and as far as I’m concerned, the money you save looks better in your pocket than anywhere else.
Rick Bloom is a financial advisor for a fee. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, email rick@bloomadvisors.com.
