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 inherit. The inheritance is divided into two parts:
I am a little confused by 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 thinking of taking the money, which is about $ 85,000, and using it to repay the mortgage. Do you think this is a good strategy?
As for Ford shares, I plan to sell the shares as soon as I get them. Would I have to pay sales tax?
Thank you, Ted
You are right that tax laws have recently changed in terms of when you inherit an IRA. In 2019, the Security Act was passed, which affected the tax rules regarding inherited IRAs. Under this new law, you are usually required to liquidate an IRA account within 10 years. This eliminates rules that require minimal distribution from year to year. As long as the IRA is liquidated within 10 years, the distribution of any amount can be taken at any time.
When distribution is made from a traditional IRA, the individual receiving the distribution is taxed on that money as ordinary income. Therefore, if you closed the IRA and received a lump sum distribution, you would be taxed at $ 85,000. This could result in being placed in a higher tax bracket and potentially disqualified for certain deductions and loans due to higher income. Therefore, in most situations I would not recommend taking a lump sum distribution in one year.
I generally recommend a distribution based on your individual tax situation. In other words, just take enough on an annual basis to stay in the same tax bracket.
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Like any other tax law, there are exceptions. The biggest exception affects the following beneficiaries: the spouse of the IRA owner, a person not more than 10 years younger than the IRA owner, the minor child of the IRA owner, persons with disabilities and those who are chronically ill. These users can either follow the 10-year rule or can take advantage of the lifetime distribution rules that were in force before the Safety Act. Unfortunately, exceptions to the law do not apply in this case.
As for selling Ford shares, you will potentially pay some taxes. Your cost basis for the stock is the fair market value of that stock on the date of death. Therefore, if you sell a share at a price of $ 14 per share, and on the day of death the value was $ 13 per share, then you would pay tax at $ 1 per share. 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, you would be taxed at a favorable rate of long-term capital gains.
It is important to remember that when you receive shares that are not IRA as inheritance, there is no inherited value tax. Your only tax consequences are when you sell shares.
If you are inheriting an IRA, it is important to develop a distribution strategy. This will result in lower taxes, and as far as I’m concerned, the money you save looks better in your pocket than anywhere else.
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