You helped me in the past and I hope you can help me now. Earlier this year my great aunt passed away and I will receive an inheritance. The inheritance is in two parts:
I am somewhat confused about the tax implications of my inheritance. My first question is with the IRA. I know the rules changed a few years ago; therefore, I would like to know what my options are. I was thinking about taking the money, which is about $85,000, and using it to pay off my mortgage. Do you think it’s a good strategy?
As for Ford’s stock, I plan to sell the stock as soon as I get it. Would I have to pay any sales tax?
thank you ted
You are correct in saying that tax laws have recently changed in relation to when you inherit an IRA. In 2019, the Secure Act was passed, which impacted the tax rules related to inherited IRAs. According to this new legislation, you must generally settle the IRA account within a period of 10 years. This eliminated the rules that required minimum distributions on a year-to-year basis. As long as the IRA settles within 10 years, distributions of any amount can be made at any time.
When distributions are made from a traditional IRA, the individual receiving the distributions is taxed on that money as ordinary income. Therefore, if you closed the IRA and made a one-time distribution, you would be taxed at $85,000. This can result in placing you on higher tax bracket and potentially disqualifying you for certain deductions and credits due to higher income. Therefore, in most situations, I would not recommend doing a global distribution in a year.
In general, I recommend making distributions based on your individual tax status. In other words, take just enough on an annual basis to keep you in the same tax bracket.
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Like all other tax laws, there are exceptions. The main exception affects the following beneficiaries: the IRA owner’s spouse, an individual who is no more than 10 years younger than the IRA owner, the IRA owner’s minor child, those who are disabled, and those who are chronically patients. These beneficiaries can follow the 10-year rule or take advantage of the lifetime distribution rules that were in force before the Security Law. Unfortunately, in the case at hand, the law’s exceptions do not apply.
In connection with the sale of Ford shares, you will potentially pay some taxes. Its share cost basis is the fair market value of those shares at the date of death. Therefore, if you sell the shares at $14 per share and on the date of death the value is $13 per share, you will pay tax on $1 per share. The sale of shares is subject to capital gains tax and any capital gain or even loss arising from the sale of inherited shares is always considered to be long-term. Therefore, you would be taxed at the favorable rate of long-term capital gain.
It is important to remember that when you receive non-IRA stock as an inheritance, there is no tax on the amount inherited. Your only tax consequences are when you sell the stock.
If you inherit an IRA, it’s important to develop a distribution strategy. This will result in lower taxes and, as far as I’m concerned, the money you save is better in your pocket than anywhere else.
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