You have helped me in the past, and I hope you can help me now. Earlier this year, my aunt passed away and I inherited. The inheritance is divided into two parts:
I’m a little 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 decided to take the money, which is about $ 85,000, and use it to pay off my loan. Do you think this is a good strategy?
With regards to the Ford stock, I plan to sell the stock as soon as I get it. Do I have to pay sales taxes?
You are right that tax laws have recently changed about when to inherit an IRA. In 2019, the Secure Act was passed, which affects tax rules regarding hereditary IRAs. Under this new legislation, you are generally required to liquidate the IRA account within a 10-year period. This eliminated the rules that require minimum distributions on a year to year basis. As long as the IRA is liquidated within 10 years, the distributions of any amount can be taken at any time.
If distributions are made by a traditional IRA, the individual who receives the distributions is taxed on this money as ordinary income. Therefore, if you closed the IRA and made a flat rate distribution, you would be taxed at $ 85,000. This could lead you to put yourself in a higher tax bracket and potentially disqualify you for various reductions and credits due to the higher income. Therefore, in most situations, I would not recommend splitting a flat rate into a year.
I recommend taking general distributions based on your individual tax situation. In other words, just take out enough on an annual basis to keep you in the same tax bracket.
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Like any other tax law, there are exceptions. The major exception affects the following beneficiaries: the wife of the IRA owner, a person no more than 10 years younger than the IRA owner, the minor child of the IRA owner, who is disabled and chronically ill. These beneficiaries can either follow the 10-year rule or benefit from the lifetime distribution rules that were effective before the Secure Act. Unfortunately, in the case at hand, the exceptions to the law do not apply.
As for the sale of Ford shares, you may pay some taxes. Your cost base of the stock is the fair market value of that stock on the day of death. Therefore, if you sell the stock at $ 14 a share and on the day of death the value was $ 13 a share, then you pay tax at $ 1 a share. The sale of shares is subject to capital gains tax and any capital gain or even loss due to inherited shares sold is always considered long-term. Therefore, you would be taxed with the favorable long-term capital gain ratio.
It is important to remember that if you inherit non-IRA shares, there will be no taxes on the hereditary value. Your only tax consequences are if you sell the stock.
When inheriting 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 are saving will look better in your pocket than anywhere else.
Rick Bloom is a financial advisor. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, please email firstname.lastname@example.org.