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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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Hi, My mother passed away in May. We are closing out her

Resolved Question:

Hi,

My mother passed away in May. We are closing out her estate and I'd like to know some possible tax implications regarding inherited funds, etc. I live in Texas, and the Estate is in Louisiana.

Here are my questions...

What are my income tax implications on the following?...

1. Fixed Annuity (Single Sum Payment was issued with no tax withheld)

2. Traditional IRA Distribution (Single Sum Payment - 10% is being withheld)

3. Traditional IRA (Already transferred into a new brokered account under my name with Vanguard) - Comprised of a VMMXX Prime Money Mkt. Fund, a VIVAX Value Index Fund, and a VWELX Wellington Fund. If I sell, then what are tax implications? If I keep, what are tax implications?

4. Individual Brokered Account (VMMXX Prime Money Mkt. Fund, and a VFIAX 500 Index Fund). Currently, this is still in the estate's name via the Executor. We're trying to decide if the accounts should be sold and distributed to me now, or if I should just transfer into my account.

5. Life Insurance Distribution

6. Sale of her home

(These questions are mostly related to tax implications, but if anyone knows about whether I should keep the stocks and IRA's, etc. for investment reasons, I'd welcome any input as well...this is the first time I have ever dealt with investments).

Thanks!!!
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Lev :

Hi and welcome to our site!
Several issues...
As a recipient of inheritance - the person does not need to claim it as income. Regardless of the value. Please see for reference IRS publication 525 page 34 (left column) -http://www.irs.gov/pub/irs-pdf/p525.pdf
Gifts and inheritances. Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.
So - inheritance itself is NOT taxable.
2,
Some income received by the estate or beneficiaries AFTER the decedent passed away might be classified as Income in Respect of the Decedent (IRD) - and could be taxable. Examples of IRD include interest and dividends paid to the estate AFTER the date of death, distributions from tax deferred accounts (401k, IRA, annuity, etc), gain from the sale of inherited assets. Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent.
Because you are the beneficiary who received that distribution - it is taxable for you.Your tax liability is not determined separately for each type of income. That distribution is added to your other taxable income - and will be based on your total income, filing status, deductions, etc.

Lev :

Specifically for your items...
1. Fixed Annuity (Single Sum Payment was issued with no tax withheld)
It is taxed the same way as if distributed to your mother.
If your mother contributed after-tax dollars to that annuity, your payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after-tax amount paid. This amount is considered investment in the contract, and includes the amounts that were taxable when contributed.

Lev :

2. Traditional IRA Distribution (Single Sum Payment - 10% is being withheld)
Same rules as above - if there are after tax contributions - they are distributed tax free - before tax contributions and earnings are taxable.
10% tax withheld will be credited toward your tax liability when you will file your tax return.

Lev :

3. Traditional IRA (Already transferred into a new brokered account under my name with Vanguard) - Comprised of a VMMXX Prime Money Mkt. Fund, a VIVAX Value Index Fund, and a VWELX Wellington Fund. If I sell, then what are tax implications? If I keep, what are tax implications?
If that is a specifically titles "inherited IRA" - the transfer is not taxable until funds are actually transferred out of the IRA account.
If however - you transferred to a regular brokered account - the full account value is reported as distribution and will be taxable for you regardless if you sell assets or not. In this case the value of assets at the time of distribution will be your basis - and when assets are sold that basis will be used in determination of your gain or loss.

Lev :

4. Individual Brokered Account (VMMXX Prime Money Mkt. Fund, and a VFIAX 500 Index Fund). Currently, this is still in the estate's name via the Executor. We're trying to decide if the accounts should be sold and distributed to me now, or if I should just transfer into my account.
As these are inherited assets - the transfer itself is not taxable event because inheritance is not taxable income. However income credited to that account is taxable.
Income credited before your mother passed away is reported on her final tax return, but income credited after that will be taxable for the estate or for beneficiaries.

Lev :

5. Life Insurance Distribution
Please see for reference IRS publication 525 - http://www.irs.gov/pub/irs-pdf/p525.pdf


- page 21


Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
So - in general - life insurance distribution should not be taxable.

Customer:

Wow, you're talking to a real dummy when it comes to this. I've never dealt with investments in my life, so I'm sure my questions sound extremely simplistic, so forgive me...


First, what do you mean by "income from the property?" Does the sale constitute income?

Lev :

6. Sale of her home.
For inherited property - you would have the basis equal to the fair market value at the time the decedent passed away. So if the property is sold shortly after - most likely - there is no gain and no taxable income. The gain is calculated as (selling price MINUS basis.

Customer:

We actually took a loss, does that reduce my taxable income?

Lev :

First, what do you mean by "income from the property?"
There might be different type of income depending of what type of asset we have,
That might be interest on the bank account on cash assets, dividends on shares in investment account, rental income of real property, etc.

Lev :

We actually took a loss, does that reduce my taxable income?
Yes - if you realize a loss - that loss may be used to offset your other income. There are some limitations however depending on type and amount of loss.

Customer:

Are realtor fees tax deductible (or rather, can the loss include the cost of the realtor).

Lev :

Are Realtor fees tax deductible (or rather, can the loss include the cost of the Realtor).
Realtor fees and other sale expenses are added to the basis - that what is called adjusted basis.
And as such - these expenses will reduce your gain or increase your loss.
You will also add to your basis improvement expenses when you prepare the property for the sale.
You may not add to the basis mortgage interest and real estate taxes that might be part of closing costs - these are deducted separately.

Customer:

How can I tell if pre-tax dollars or after-tax dollars were contributed to any of these funds?

Customer:

3. The traditional IRA funds were "transferred" into a new Vanguard account in my name...as the benefactor. So, is my IRA account considered an "extension" of hers, so that I'm not taxed yet?

Customer:

4. I didn't even think about "her" final tax return. Who needs to file this? Is this something that the executor does?

Expert:  Lev replied 1 year ago.
How can I tell if pre-tax dollars or after-tax dollars were contributed to any of these funds?
If you mother contributed any pre-tax money into her IRA account - there should be form 8608 filed with her tax return for that year.
To verify - you need copies of her tax returns and verify. There is no other way.

The traditional IRA funds were "transferred" into a new Vanguard account in my name...as the benefactor. So, is my IRA account considered an "extension" of hers, so that I'm not taxed yet?
That is the issue to be verified with the administrator of your account.
Inherited IRA must be designed as IRA account and must be titled similar to "<your mother's name> (deceased <date>) Inherited IRA for benefit of <your name>, Beneficiary."

4. I didn't even think about "her" final tax return. Who needs to file this? Is this something that the executor does?
Yes - filing her final tax return is your responsibility as an executor.
If the taxpayer dies - all income received by the taxpayer up to the day he/she passed away is reported on the final tax return of the decedent. The income received before the death will be taxable on the decedent final return on form 1040. Write "DECEASED," the decedent's name, and the date of death across the top of the tax return.
The decedent's income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death.
You must attach Form 1310 to all returns and claims for refund - so refund checks will be issued with your name - www.irs.gov/pub/irs-pdf/f1310.pdf
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23191
Experience: Taxes, Immigration, Labor Relations
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