You have helped me in the past and I hope you will be able to help me now. My aunt died earlier this year and I will receive an inheritance. Inheritance consists of two parts:
I am a bit confused about the tax implications of my inheritance. My first question concerns the IRA. I know the rules changed a few years ago; so I would like to know what my options are. I was thinking of taking the money, that’s about $ 85,000, and using it to repay the mortgage. Do you think this is a good strategy?
As for Ford’s stock, I plan to sell the stock as soon as I get it. Should I pay sales tax?
You are right that tax laws have recently changed as to when you inherit an IRA. In 2019, a safe law was passed that affected the tax rules regarding inherited IRAs. Under the new legislation, you must liquidate your IRA account within a 10-year period. This abolished the rules that require a minimum distribution for each year. As long as the IRA is liquidated within ten years, any amount may be distributed at any time.
When distributions are made from a traditional IRA, the individual who receives the distributions is taxed with that money as normal income. So if we closed the IRA and used a lump sum, we would be taxed at $ 85,000. This could lead you to a higher tax bracket and could disqualify you for certain deductions and credits due to higher income. Therefore, in most cases, I do not recommend a flat-rate distribution in one year.
I generally recommend that you share the distribution based on your tax status. In other words, take so much a year to be in the same tax bracket.
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Like any other tax law, there are exceptions. The main exception affects the following beneficiaries: the spouse of the IRA owner, an individual not more than 10 years younger than the IRA owner, the minor child of the IRA owner, the disabled and the chronically ill. These beneficiaries may comply with the 10-year rule or may take advantage of the rules on the distribution of lifetime that were in force before the Protection Act. Unfortunately, in the present case, the exceptions to the law do not apply.
As for selling Ford stock, you may have to pay some taxes. Your cost basis for inventory is the fair market value of that inventory at the date of death. So if you sell a share for $ 14 per share and it was worth $ 13 per share on the day of death, you would have to pay $ 1 per share tax. The sale of shares is subject to capital gains tax, and any capital gain or even loss due to the sale of inherited shares is always considered long-term. Therefore, they would be taxed at a favorable long-term rate of return on capital.
It is important to know that when you receive non-IRA stocks as inheritance, there are no taxes on the inherited value. Your only tax consequences are when you sell the stock.
If you are inheriting an IRA, it is important that you develop a distribution strategy. This will result in lower taxes and as far as I’m concerned, the money saved looks better in your pocket than anywhere else.
Rick Bloom is a financial advisor who pays only for a fee. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, write to firstname.lastname@example.org.