You have helped me in the past, and I hope you can help me now. Earlier this year my great aunt passed away and I will be receiving an inheritance. The inheritance is in two parts:
I am somewhat 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 was considering taking the money, which is around $ 85,000, and using it to pay off 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 have it. Do I have to pay sales tax?
You are correct that tax laws have recently changed regarding when you inherit an IRA. In 2019, the Secure Act was passed, which impacted the tax rules for inherited IRAs. Under this new legislation, you are generally required to liquidate the IRA account within 10 years. This eliminated the rules requiring minimum distributions on an annual basis. As long as the IRA is liquidated within 10 years, distributions of any amount can be withdrawn at any time.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 receive a lump sum distribution, you would be taxed on $ 85,000. This could put you in a higher tax bracket and potentially exclude you from certain deductions and credits due to your higher income. Therefore, in most situations, I would not recommend receiving a flat-rate distribution in one year.
I generally recommend taking distributions based on your individual tax situation. In other words, take out only enough each year to keep yourself in the same tax bracket.
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Like any other tax law, there are exceptions. The major exception impacts the following beneficiaries: the spouse of the owner of the IRA, a person who is no more than 10 years younger than the owner of the IRA, the minor child of the owner of the IRA ‘ARI, the disabled and chronically ill. These beneficiaries can either follow the 10-year rule or take advantage of the lifetime distribution rules that were in place before the Secure Act. Unfortunately, in this case, the exceptions to the law do not apply.
When it comes to selling Ford stock, you will potentially have to pay taxes. Your share cost basis is the fair market value of that share on the date of death. Therefore, if you sell the stock for $ 14 a share and on the date of death the value was $ 13 a share, you would pay tax on $ 1 a share. The sale of shares is subject to capital gains tax and any capital gain or even loss resulting from the sale of inherited shares is always considered long term. As a result, you would be taxed at the advantageous long-term capital gain rate.
It is important to remember that when you receive non-IRA shares as an inheritance, there is no inherited value tax. Your only tax consequences are when you sell the stock.
If you are inheriting from an IRA, it is important to develop a distribution strategy. This will mean 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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