You have helped me in the past, and I hope you can help me now. Earlier this year my great-aunt died and I will receive an inheritance. The inheritance is divided into two parts:
I am confused by the tax implications of my inheritance. My first question is about the IRA. I know the rules changed a couple of years ago; therefore, I would like to know what my options are. I was thinking of taking the money, which is about $ 85,000, and using it to pay off the mortgage. Do you think this is a good strategy?
As for the Ford stock, I plan to sell it as soon as I get the stock. Should I pay sales tax?
Thank you, Ted
You are right that tax laws have recently changed when you inherit an IRA. In 2019, the Safe Law was passed, which had an impact on tax rules on inherited IRAs. Under this new legislation, you must generally settle your IRA within 10 years. This eliminated the rules that required minimum distribution year after year. As long as the IRA is settled within 10 years, distributions of any amount may be made at any time.
When distributions are made from a traditional IRA, the individual who receives the distributions is the ordinary tax on that money. Therefore, if you closed the IRA and distributed a lump sum, you would pay $ 85,000. This could lead to a higher tax bracket and disqualify you from certain deductions and credits for having higher incomes. Therefore, in most situations, I would not recommend a sudden distribution within a year.
I recommend making distributions based on your individual tax situation. In other words, you get out enough every year to stay in the same tax bracket.
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Like all tax laws, there are exceptions. The main exceptions apply to the following beneficiaries: the spouse of the IRA owner, an individual who is not less than 10 years younger than the IRA owner, the minor son of the IRA owner, who is disabled and has a chronic illness. These beneficiaries can comply with the 10-year rule or take advantage of the life-sharing rules that were in effect before the Safe Law. Unfortunately, in the case at hand, the exceptions to the law do not apply.
As for the sale of Ford shares, you will pay some taxes. The basis of the cost of the shares is the market value of that share from the date of death. Therefore, if you sell the share for $ 14 per share and the value on the day of death is $ 13 per share, then you would pay $ 1 tax on the share. The sale of shares is subject to capital gains tax and capital gains or capital gains losses are always considered long-term. Therefore, you would be taxed at the rate of long-term capital gains.
It is important to remember that when you receive non-IRA shares as inheritance, they are not taxed on the inherited value. The only tax consequences are when you sell the shares.
If you inherit an IRA, it’s important to develop a distribution strategy. This will lead to lower taxes and, as far as I’m concerned, the money you save is better in your pocket than anywhere else.
Rick Bloom is a quota financial advisor. His website is www.bloomadvisors.com. If Bloom would like to have your questions answered, please email firstname.lastname@example.org.