You have helped me in the past and I hope you can help me now. Earlier this year my aunt died and I will receive an inheritance. The legacy is in two parts:
I am a little confused about the tax implications of my inheritance. My first question concerns the IRA. I know the rules were changed a few years ago; therefore I would like to know what my options are. I considered taking the money, which is about $ 85,000, and using it to pay down my mortgage. Do you think this is a good strategy?
As for the Ford stock, I plan to sell the stock as soon as I get it. Do I have to pay any sales tax?
It is true that tax laws have recently changed as to when you inherit an IRA. In 2019, the Secure Act was passed, which affected tax rules regarding inherited IRAs. Under this new law, you are generally required to settle the IRA account within a 10-year period. This eliminated the rules that require minimum distribution on an annual basis. As long as the IRA is settled within 10 years, distributions of any amount can be taken at any time.
When distributions are made from a traditional IRA, the person receiving the distributions is taxed on that money as ordinary income. Therefore, if you were to close the IRA and take a one-time breakdown, you would be taxed at $ 85,000. This can result in placing you in a higher tax bracket and potentially disqualifying you from certain deductions and credits due to the higher income. Therefore, in most situations, I would not recommend taking a one-time distribution in one year.
I generally recommend taking distributions based on your individual tax situation. In other words, only take out enough on an annual basis to stay in the same tax bracket.
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Like any other tax law, there are exceptions. The largest exception affects the following recipients: the IRA owner’s spouse, a person no more than 10 years younger than the IRA owner, the IRA owner’s minor child, those with disabilities, and those who are chronically ill. These beneficiaries can either follow the 10-year rule or can benefit from the lifetime distribution rules that applied before the Secure Act. Unfortunately, the exceptions to the law in the present case do not apply.
With regard to the sale of the Ford share, you may have to pay some taxes. Your cost basis for the stock is the current market value of this stock from the date of death. Therefore, if you sell the stock at $ 14 per share. Share, and on the date of death the value was $ 13 per share. Share, you would pay tax of $ 1 per share. Shares. Sale of shares is subject to capital gains tax and any capital gain or even loss due to sale of inherited share is always considered long term. Therefore, you will be taxed with the favorable long-term capital gain.
It is important to remember that when you receive non-IRA shares as an inheritance, there is no tax on the inherited value. Your only tax consequences are when you sell the stock.
If you inherit an IRA, it is important to develop a distribution strategy. This will result in lower taxes, and to me, the money you save looks better in your pocket than they do elsewhere.
Rick Bloom is a financial advisor only. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, please email firstname.lastname@example.org.