22 May What taxes are owed on inherited annuity?
Q. My grandmother told me she’s put my name as the beneficiary of her annuity. What kind of taxes do I have to worry about?
A. We always have to worry about taxes of one kind or another.
For an inherited annuity, you’ll have to look at income taxes.
The amount of income tax will depend on the basis of the asset, the type of annuity and the payout period, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
“The basis of most assets transferred from a decedent is the date of death value; however, this is not true for annuities,” Romania said. “The basis of an inherited annuity is the same as the decedent’s basis, which is based upon cost to the decedent and fees paid.”
She said annuities can be purchased in qualified retirement accounts may have a zero basis.
Also, the income tax incurred may also vary based upon the payout period.
“The Internal Revenue Service has special rules for determining how tax is calculated but in general it will be taxed to you the same way as it was taxed to the decedent,” Romania said.
Then there are estate taxes to consider.
If the value of your grandmother’s estate plus adjusted taxable gifts exceeds $5.43 million — or the exemption amount at her time of death — and there is no direction in the will to pay taxes from the residuary estate, you may be assessed a portion of any federal estate tax paid, Romania said.
“The estate tax will be allocated based upon the ratio of the value of the annuity for estate tax purposes to the entire value of the estate,” she said. “However, in the event that you are required to pay federal estate tax as a result of inheriting the annuity, you should discuss with your accountant or tax advisor the applicability of IRC §691 (c), which provides the beneficiary with an itemized deduction for income tax purposes based on estate tax attributable to `income in respect to decedent’ reported on the federal estate tax return.”
Annuities comprise income in respect to decedent, she said.
A grandchild is a Class A beneficiary, so you will not have to pay New Jersey Transfer Inheritance tax. But if the value of your grandmother’s estate together with adjusted taxable gifts is greater than $675,000, there may be a New Jersey estate tax incurred.
“If there is such a tax, and if there is no direction in the will for the taxes to be paid from the estate itself, then a portion of the tax, in proportion to the value of the annuity for estate tax purposes to the entire estate, may be assessed to you,” Romania said. “The IRC §691(c) deduction allowed for federal estate tax does not apply to state estate tax paid.”
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This story was first posted in June 2015.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.