You have helped me in the past and I hope you can help me now. Earlier this year my great-aunt passed away and I will inherit. The legacy is in two parts:
I am somewhat confused about the tax implications of my inheritance. My first question concerns the IRA. I know the rules changed a few years ago; therefore I would like to know what my options are. I was thinking of taking the money, which is about 85,000 US dollars, and using it to repay the mortgage. Do you think this is a good strategy?
As for Ford stocks, I plan to sell them as soon as I get them. Would I have to pay sales tax?
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 law, you are usually required to liquidate an IRA account within 10 years. This has eliminated rules that require a minimum allocation from year to year. As long as the IRA is liquidated within 10 years, the distribution of any amount can be made at any time.
When distribution is made from a traditional IRA, the individual receiving the distribution is taxed on 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 distribution based on your individual tax situation. In other words, take out enough on an annual basis to stay in the same tax group.
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Like any other tax law, there are exceptions. The main exceptions affect the following beneficiaries: the spouse of the IRA owner, an individual not older than 10 years from the IRA owner, the minor child of the IRA owner, persons with disabilities and those who are chronically ill. These beneficiaries can either follow a ten-year rule or can take advantage of the life-time allocation rules that were in force before the Insurance 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. The basis of your stock price is the fair market value of that stock on the date of death. Therefore, if you sell shares at a price of $ 14 per share, and on the date of death the value was $ 13 per share, then you would pay $ 1 per share tax. 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 inventory that is not inherited from the IRA, there is no inherited value tax. The only tax consequences are when you sell the shares.
If you are inheriting 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, send an email to firstname.lastname@example.org.