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The distribution will be taxable to you as it would have been to her. There will be no early withdrawel penalty tax assessed since the distribution was due to death.
You may wish to rollover the remaining 10% into your own IRA to avoid tax on that portion that is not needed to pay off the medical bills. This will reduce tax for the current year and allow you to keep the remainder as deferred income which when you tax distribution later will give you more options. If your income is below filing requirements when you do take the distribution, it will not be taxed at all.
Many states do not tax pensions, IRAs and annuity distributions. If this is the case, you will benefit from the subtraction on that form.
You are allowed to use the basis your wife had in the IRA and the Annuity to reduce your taxable portion. Her deferred income will become taxable to you when you take the distribution even if the penalty tax will not be assessed due to her death.
You will be eligible to use MFJ filing status if your wife died in 2004 and you have not remarried by 12/31/04. This will allow you to use her exemption amount of 3100 as well as your own to offset income.
The information listed(if I understand correctly) is aprox 8400 interest and dividends, capital gain/loss of -0-, annuity distribution 50000 reduced by basis of 25000 for 25000 taxable and IRA distribution of 25000 with no basis possibly. This comes to aprox 58400 gross income. With your exemption and deductions, you will have a -0- taxable income and -0- income tax due. The return must be filed even if there will be a -0- amount. If this is the case, you should not worry about finding the cost basis of the IRA since it will not increase your tax benefit.
I was concerned that you may feel you had to empty the IRA and Annuity funds when you did not have a need for the cash. The larger balance in your own IRA will see you thru your own retirement.