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Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2309
Experience:  Certified Public Accountant
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Mom passed with $70,000 in three accounts. Two are normal

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Mom passed with $70,000 in three accounts. Two are normal investment accounts in which she received 1099s and filed income taxes. On these two, her son is a JTROS. 1) Will he have to pay taxes on any withdrawals. The third is an annuity account that was not annuitized. Her daughter is the beneficiary and will receive a death benefit and plans on using the money to pay for funeral expenses. There will be some funds left over. 2) Are any of those taxable? Mom and all her kids live in Michigan.
JA: The expert will know how to help. Is there anything else important you think the expert should know?
Customer: There is no will and nothing to go through probate.

Hi, my name is Mark. I will be happy to help you with your questions. Please give me a moment to prepare your response.

For the stock account the son will inherit his mother's basis on half of the account. On the other half of the account there will be a step up in basis to the fair market value at the time of her death. He may need to pay taxes if stocks are sold for the distributions or dividends have been received after the death of his mother.

IRS Publication 575 says that, in general, those inheriting annuities pay taxes the same way that the original annuity owner would. In turn, taxation of annuity distributions depends on whether they started before or after the required starting date for payouts.

If the daughter elects periodic distributions, then the portion of each payment that comes from accumulated earnings is taxable, while the portion that comes from the original premium payment is not. If you elect non-periodic distributions, however, the IRS typically treats distributions as taxable earnings until they're used up, after which further payouts are treated as return of the original premium payment, and therefore not taxable.

Customer: replied 2 months ago.
I think I understand. On the stock accounts, which were really mostly bonds, she always had the dividends and distributions reinvested. So her basis should be near the actual value.If most of the annuity is used for funeral expenses - and the checks are cut directly to the funeral home, etc., are those exempt from being taxed?

For the stock account, the may be a small step up in basis if any of the bonds appreciated but I would agree that it is probably close to fair value.

The annuity would be taxed a little differently. It would be taxed the same way that if it was distributed to the mother. If the distributions are non-periodic then these would be taxable since they would be coming from the earnings. The daughter would receive a 1099-R for the distribution and the amount that is taxable.

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