You have helped me before, and I hope you can help me now. Earlier this year my aunt died and I was going to receive an inheritance. The legacy is in two parts:
I am quite confused about the tax implications of my inheritance. My first question about IRAs. I know the rules were changed a few years ago; so, I want to know what my options are. I considered taking the money, which was around $ 85,000 and using it to pay off my credit. Do you think that’s a good strategy?
Regarding Ford stock, I plan to sell the stock as soon as I can. Why should I pay tax on sales?
Thank you, Ted
You are right that the tax law recently changed when you received an IRA. In 2019, the Securities Act was passed, which affects the tax rules of inheritance IRAs. Under this new legislation, you are generally required to dissolve an IRA account within 10 years. This eliminates the rule that requires a minimum distribution each year. As long as the IRA is dissolved within 10 years, a distribution of any amount can be obtained at any time.
When distributions are made from a traditional IRA, the individual who receives the distribution is taxed on that money as ordinary income. Because of that, if you close an IRA and take a small distribution, you will be taxed at $ 85,000. This can lead to putting you into a higher tax bracket and potentially voiding your eligibility for deductions and certain credits due to higher income. Therefore, in most situations, I would not recommend taking a lump sum distribution in a year.
I generally recommend taking a distribution based on their respective tax conditions. In other words, just take enough out each year to keep you in the same tax brackets.
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As with every other tax law, there are exceptions. The main exceptions affect these heirs: couples who have an IRA, people who are no more than 10 years younger than those who have an IRA, young children who have an IRA, the disabled and the chronically ill. These beneficiaries can follow the 10-year rule or can take advantage of the life-time distribution rules that were in effect before the Safe Act. Unfortunately, in the current case, the exceptions from the law do not apply.
Regarding the sale of Ford shares, you potentially pay some taxes. The cost base of your stock is the good market value of the stock up to the expiration date. Therefore, if you sell shares at $ 14 per share and on the expiration date the price is $ 13 per share, then you will pay $ 1 share tax. The sale of shares is subject to capital gains tax and capital gains or even losses due to the sale of inherited shares, then considered long -term. Therefore, you will be taxed at your preferred long -term capital gain rate.
It is important to remember that when you receive non-IRA shares as an inheritance, there is no tax for the value of the inheritance. Your tax consequences are only when you sell shares.
If you accept an IRA, it is important to develop a distribution strategy. This will result in lower taxes, and as far as I am concerned, the money you save looks better in your pocket than elsewhere.
Rick Bloom is a fee-only financial advisor. Its web page is www.bloomadvisors.com. If you would like Bloom to respond to your questions, email firstname.lastname@example.org.