To pay my inheritance tax, should I use money from the sale of my house or withdraw from my investment account?
I am 57 years old and inherited a substantial IRA, investment account, and house from my 65-year-old fiancé. I will receive required minimum distributions (RMD)s from the IRA this year, enough to live comfortably on. To pay the 15 percent Pennsylvania inheritance tax, should I use money from selling the house I inherited, or withdraw money from the investment account I inherited? I am unfamiliar with managing investment accounts. Which option should I choose?
First and foremost, I am very sorry to hear about the departure of your loved one.
A few questions to ask yourself:
- How much money do you need to cover the PA taxes?
- Are you going to be needing cash to pay for a replacement home? If so, how much and will the proceeds of the sale cover the PA tax bill and the purchase of a new home?
Personally, if I already had a home or if I were to purchase a new home, and could cover the inheritance tax with the house proceeds, I would use that strategy and let the investments continue to work for you. To make it simple, use the house proceeds.
I hope this helps.
You are asking very good questions. You may consider taking money from the inherited investment account for easiest access to the money for the PA inheritance tax. When your fiance died, her investment account got a stepped up date of death value so it is unlikely you would have a significant capital gains tax to pay, if any. When the house is sold, you may choose to add that money back into the investment account. The house value should also receive a date of death value when sold. The IRA money would not receive a date of death value for tax purposes. You may consider contacting a Financial Professional to assist you in understanding your new investment and IRA accounts since you are unfamiliar in managing them. You can search at oneFPA.org for a professional in your area.
Sounds to me like you might need some professional help. Be sure to get someone who is fee based and acts as your Fiduciary, not someone who works on commissions etc... But to answer your question, if you are talking about a taxable account when you say "investment account," it really doesn't matter versus the home proceeds as they are both after tax money. So whether you take form one pool or the other, has no bearing on taxes unless you are talking about selling something in the investment account to pay the tax. Then is could have a bearing. I would not take an extra IRA distribution to pay the tax.
If you are really unsure and don't know, probably the easiest safest alternative would be just use some of the sale proceeds from the home if you are selling anyway. Again, if we are talking about material amounts you really need to speak with someone knowledgeable in taxes - estate, investment, & income all 3. If you want to reach out to me to pick my brain I can probably quickly answer your questions with just a little more detail. I just hate to give you bad advice as I am a little unclear of what you mean, especially by "investment accounts" and whether you have already "sold" or intending to sell the house anyway or would be doing so to pay the tax.
Hope this help and best of luck, Dan Stewart CFA®
I'm very sorry for your loss. It's never easy making these kinds of decisions while grieving.
Here's what I can offer based on what you've said.
If the house was in your fiance's name and you're not planning on living in it, selling it is a good option. Depending on the real estate market, selling the house could take some time. If you need the cash to pay the taxes sooner than the house sells, the investment account gets the money to you quickly. If you additional cash after paying the taxes, you can always put that back into the investment account.
If you're living in the house and want to keep it, then selling some of the investments would make sense. Gains from assets held over one year get taxed at favorable capital gains tax (either 15% or 20%). Depending on your income, that may be the lower rate. It appears that both the house and investment account would qualify for capital gains tax rates.
So, either option is fine.
When you take you RMDs you should have the custodian withhold taxes at the tax rate you use on your return for both Federal and state tax. I am assuming you are talking about paying a long term capital gain tax on investments in the investment account. This tax is due by the time you file your tax return which can include extension until Oct 15. Given that the house is illiquid and you do not know when you will actually recieve the proceeds from it you may have to take money from the investment account to pay the 15% tax. Also after you sell the house you will most likely put the proceeds into the investment account. Since you were not offically married you are not allowed to roll her IRA into your own but rather retitle her IRA as an Inherited IRA and take distributions based on your life.