Tax Time - A Question for Tax Savvy Freepers...

02.02.04 | mlmr

[SnarlinCubBear]

This is SnarlinCubBear's husband.

You have two different issues. One is an income tax issue. Annuities are taxed on increase over the premiun paid for the annuity. That is, if your father submitted $100,000 when he purchased the annuity and it was worth $200,000 at the time of his death, the increase is $100,000 and it will be taxed to the beneficiaries as "ordinary income." This has been tax-deferred until the distribution. Now the taxes must be paid.

If the annuity was the kind that is already paying monthly payments for some period certain in the future, there is a calculation known as Income in Respect of a Decedent (IRD). This is a confusing and complicated calculation, but in essence you will pay some more in the way of estate tax and get an IRD credit against future income. You will need to get to know this process since there is no where in your income tax return paperwork that asks for an IRD credit.

Confusing, huh?!?

You also apparently have an estate tax problem. Depending on what year your father died, he could pass on $1M without any estate tax (that was in 2003, in 2004 it is up to $1.5M and will eventually go away - Thanks to GW!!) This annuity could potentially be subject to both income and estate tax depending on the size of the estate.

If you inherited enough to have these problems, you can afford to hire a CPA to make sure it gets handled correctly. If you didn't inherit enough to afford a CPA, then you should only be obligated to income tax on the growth portion of the annuity.

As you can see, those of us in the financial services ADVISORY business earn our keep!!!

[fuzzthatwuz]

"quickly get the money out of the IRA"

Therein lies the problem. You and your brother may be responsible for any tax which would have been incured by your father if he himself had withdrawn the asset... Get thee to a good accountant!

[mlmr]

I am looking at the 1099 The gross distribution was 34000 and the same for the taxable amount. The disrtribuion code is 4 meaning death. My percentage of the total distribution was 50%.The square that says Ira(Sep) Simple is checked off

[TheCPA]

"I have a question for the tax-astute. My father died this year and his annuity paid out to my brother and me. I have just discovered that I owe taxes on what was paid out from his fund. I thought since it was insurence based that there would be no taxes owed. I also paid estate bills with the money. What is a girl to do?"

Most inheritances are excluded from gross income. However, the annuity is gross income under Sec. 61(a) because it constitues income in respect of a decedent under Sec. 691(a). Because the annuity's value is also incuded in the decedent's gross estate, you are entitled to deduct the estate tax attributable to the income in respect of a decedent as an itemized deduction under Sec. 691(c).

[csmusaret]

I don't know how old you are, but AARP has a free tax advise service for members.

[mlmr]

Simple answer: If it was taxable, they would have taken out withholding tax. But hire a CPA and verify that.


Not so simple, they sent me a form asking me whether I wanted to take out withholding. I thought since it was insurence that I didn't need to . Now I undersand that annuities are not like insurance.

[Burn24]

My tax guy in NEW YORK CITY only charges $350.

Everyone needs an accountant, so find a new one.

[SnarlinCubBear]

New information!!
This is not taxed as an annuity, but as an IRA (Individual Retirement Account). Apparently it was made up totally of pre-tax contributions. If so, then 100% of the distribution is taxable income.

[Auntie Mame]

If you got a 1099, then you owe income taxes on it.

This just plain isn't true. The only thing a 1099 means is you probably need to file a tax return (in case you were thinking of skipping it) and tell the IRS what that money was for. There are many situations where taxes are NOT owed on money reported on a 1099.

From some of the comments on this thread, it's apparent there are many freepers who are paying more taxes than they should. This makes me very sad.

One of the best pieces of advice I've ever had re taxes is: "If you aren't being audited every year, you're paying too much taxes." This statement is a little way out there, but the general premise is correct. Think about it.

This is not being dishonest, it's good old fashioned legal tax avoidance. The laws are in place, it's up to us to use them to our own benefit.

The person who started this thread "probably" doesn't owe taxes on the money from her father's estate, but if she insists on doing her own taxes to save $1,000 for a tax person (which is way too much for a simple tax return) it's probable she will pay a whole lot more than $1,000 in taxes that she doesn't even owe.

Folks, our job, as conservatives, is to give as little to that behemoth in Washington as possible. To even consider paying taxes in a situation like this without checking it out with a professional is beyond comprehension.

[mlmr]

What you are saying is that I pay taxes on what my father made in the annuity. My dad had the annuity for a few years he initally put in about 120,000. He it dispersed him an income and when he died the market was low and there was 68000 in it. So I need to find out more informaion about how much of this money is actually his money and how much of this money was income earned? right?

My brother got the house the cars, and everything else. I got the 26000 which I used to pay off my apartment building so I would have some income to support my four childrn while I worked two jobs. so no, I do not have that sort of discretionary fund. I am not trying to pull a sob story. Those are just the facts.

How do I find out what the growth portion is? Do I go back to Allamerica and get some sort of table?

[mlmr]

Most inheritances are excluded from gross income. However, the annuity is gross income under Sec. 61(a) because it constitues income in respect of a decedent under Sec. 691(a). Because the annuity's value is also incuded in the decedent's gross estate, you are entitled to deduct the estate tax attributable to the income in respect of a decedent as an itemized deduction under Sec. 691(c).

Holy Tomato! Does that mean that I need to find out how much of this is my dad's money?

[lchoro]

If you had contacted the credit card company and explained that the accountholder had passed away, they would've closed the account and likely frozen the debt. All of the accounts ( $ 40,000 worth ) of my late father were frozen after I contacted them, contrary to the advice of the attorney. The estate managed to pay off all of the debts within a year but incurred no more interest.

I would get a CPA to do your taxes. Since the funds were used to pay off expenses of your late father, you and your brother might have to declare the $ 15,000 as a loan from you and your brother to the estate. You might be able to declare accrued interest owed by the estate to you as a deductible expense and the estate would have to reimburse for the amount of the loan plus the interest.

[mlmr]

I am 50.

[mlmr]

If so, then 100% of the distribution is taxable income.

I think I am going to be sick....

[SnarlinCubBear]

What this means is that all of what you received in taxable as ordinary income to you as beneficiary of his pre-tax IRA. It is too bad you used "your" money to pay his estate costs rather than taking those expenses from the estate before distributions. These kinds of innocent errors are what happens when we fail to hire professional advisors when we should. I don't mean this a "critical" of you, but as instructional for all who read this post.

[paul51]

I had a CPA do our return for the past 16 years and it ran between 1200 and 1500 per year. I cannot afford this

Is your return unusually complicated?

[mlmr]

If you had contacted the credit card company and explained that the accountholder had passed away, they would've closed the account and likely frozen the debt. All of the accounts ( $ 40,000 worth ) of my late father were frozen after I contacted them, contrary to the advice of the attorney. The estate managed to pay off all of the debts within a year but incurred no more interest.


My brother did not want to contact the credit card company and I assumed that the credit card company would find out that dad died through the ss death index

[CGASMIA68]

Not enough info given......visit the link below..create an identity and add your question to the "FORUM" just as you did here..


http://www.irahelp.com/index.shtml

[mlmr]

What this means is that all of what you received in taxable as ordinary income to you as beneficiary of his pre-tax IRA. It is too bad you used "your" money to pay his estate costs rather than taking those expenses from the estate before distributions. These kinds of innocent errors are what happens when we fail to hire professional advisors when we should. I don't mean this a "critical" of you, but as instructional for all who read this post.

I dont take this as criticism. Is there a chance of me showing that I paid the account and charging it off somehow. I think the estate went through probate already.

[lchoro]

<<>> Got it backwards. The estate needs to reimburse you and your brother for the $ 15,000 plus interest. The estate has to declare these as expenses and on any tax return, declare the interest as a deduction. When the interest is paid to you and your brother, you both have to declare it as interest income. Have you already distributed all net worth from the estate? The estate owes you money as I've stated above.