You have helped me in the past and I hope you will be able to help me now. My aunt died earlier this year and I will receive an inheritance. Inheritance consists of two parts:
I am a little confused by the tax implications of my inheritance. My first question concerns the IRA. I know the rules changed a few years ago; so I would like to know what my options are. I was thinking of taking the money, that’s about $ 85,000, and using it to repay the mortgage. Do you think this is a good strategy?
As for Ford’s stock, I plan to sell the stock as soon as I get it. Should I pay sales taxes?
You are right that tax laws have recently changed as to when you inherit an IRA. In 2019, a safe law was passed that affected the tax rules regarding inherited IRAs. Under this new legislation, you usually have to liquidate an IRA account within a 10-year period. This abolished the rules requiring minimum distributions for each year. As long as the IRA is liquidated within ten years, any amount may be distributed at any time.
When distributions are made from a traditional IRA, the individual who receives the distributions is taxed on that money as ordinary income. So if we closed the IRA and accepted a lump sum, we would be taxed at $ 85,000. This could lead you to a higher tax bracket and could disqualify you for certain deductions and credits due to higher income. Therefore, in most cases, I do not recommend a flat-rate distribution in one year.
In general, I recommend that you divide the distribution according to your tax situation. In other words, take as much per year 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 more than 10 years younger than the IRA owner, the minor child of the IRA owner, the disabled and the chronically ill. These beneficiaries can either comply with the 10-year rule or take advantage of the rules on the distribution of life expectancy that applied before the Protection Act. Unfortunately, in the present case, the exceptions to the law do not apply.
As for selling Ford stock, you may have to pay some taxes. Your cost basis for inventory is the fair market value of that inventory at the date of death. So if you sell a share for $ 14 per share and it was worth $ 13 per share on the day of death, you would have to pay $ 1 per share tax. The sale of shares is subject to capital gains tax, and any capital gain or even loss due to the sale of inherited shares is always considered long-term. Therefore, they would be taxed at a favorable long-term rate of return on capital.
It is important to know that when you receive non-IRA stocks as inheritance, there are no taxes on the inherited value. Your only tax consequences are when you sell the stock.
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 saved looks better in your pocket than anywhere else.
Rick Bloom is a financial advisor who pays only for a fee. His website is www.bloomadvisors.com. To have Bloom answer your questions, write to email@example.com.