Q: My mom passed away and left some assets including her IRA valued at $78,000 to me and my two sisters. How much is the IRS likely to tax us? I’ve heard scary figures like 65 percent. Is there a way to lower that amount?
A: My condolences on the loss of your mother. Unless you take a lump sum distribution at the time you inherit the money, the IRS allows you and your sister to rollover the IRA into an account known as an inherited IRA. If you rollover the funds into an inherited IRA, you’ll have 5 years to withdraw the funds entirely or you must withdraw funds over time.
When you withdraw the funds, you’ll pay income tax on the accounts at your marginal tax rate. So if you are in the 25 percent bracket and have a state tax of 4 percent, you’ll pay a total of 29 percent tax on the funds. If you withdraw funds over time – there’s a formula for determining how much money you have to withdraw each year – you lessen the amount you pay in tax. If you take a lump sum payment, you might bump yourself up into a higher tax bracket and end up paying more.
If your mother also left real estate, like a house, you should be able to inherit it at its value on the day she died, which is known as a stepped-up basis. If you turn around and sell the property for approximately the same value as on the day she died, you should not owe any additional taxes and will be able to keep any profits after paying off any mortgage liens against the property.
If your mother’s total estate exceeds $3.5 million, you may have to pay additional taxes. Please consult with your tax preparer or an estate attorney for more details.
Jan. 19, 2009.