Tax Withholding for inherited annuities

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Tax Withholding for inherited annuities

Postby JerseyKC » Sat May 29, 2010 9:25 am

Have inherited 3 different annuities recently and am looking over the withholding information

The total amount if taking a lump sum is approximately $40,000. Our taxable income is $120,000 and we live in NJ > would it be worth it to have 25% withheld for federal taxes and do a small amount for the state taxes?

Normally, we get about $2,000 refund on federal tax and about $700 on state taxes

Thanks
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Postby GG » Sat May 29, 2010 4:30 pm

What kind of annuities are they?

Did the estate pay the taxes already and distribute the $ to you?

If they are stil in annuities, you pay the tax on the difference between current market value and cost basis. How much is that?
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Postby insurance1288 » Sat May 29, 2010 5:25 pm

JerseyKC,

You may want to ask your question again because it doesn't seem clear. Are these annuities qualified or unqualified?

Is $40,000, the total value of the annuities? If so, and if they are unqualified, what is the cost basis? Is $40,000 the gain? Is $40,000 what you are expecting to pay in tax?

Anyway, you need to get very specific with your question, otherwise, you may get correct answers that aren't actually correct for you.
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Postby JerseyKC » Sat May 29, 2010 7:45 pm

insurance1288 wrote:JerseyKC,

You may want to ask your question again because it doesn't seem clear. Are these annuities qualified or unqualified?

Is $40,000, the total value of the annuities? If so, and if they are unqualified, what is the cost basis? Is $40,000 the gain? Is $40,000 what you are expecting to pay in tax?

Anyway, you need to get very specific with your question, otherwise, you may get correct answers that aren't actually correct for you.


Thanks GG and insurance > sorry about not being clear

Found out that they are unqualified (basically from life insurance companies) and one ING account. Per the information that I got > the legal executor is saying take in a lump sum > but none of the other parties earn as much as we do.

Only got one of the three showing a value and lists as follows:
full value as of 4/30/10 of $11,419.36
Taxable portion $6,149.36

Understand the implications of this one. Probably should call the other two to see if that information is available from them.

To answer GG's question > the taxes were not paid by the estate. They were set up 20 years ago.

I thought we would go ahead and use 25% withholding for the Federal and 3% for NJ at this point, it isn't money that we need but would be filtered into Roth IRA's over the next several years from money market or CD's. Would rather not be hit with a bunch of penalties for something that we can put up front and if too much get back next year.

Thanks
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Re: Tax Withholding for inherited annuities

Postby grabiner » Sun May 30, 2010 12:52 pm

JerseyKC wrote:Have inherited 3 different annuities recently and am looking over the withholding information

The total amount if taking a lump sum is approximately $40,000. Our taxable income is $120,000 and we live in NJ > would it be worth it to have 25% withheld for federal taxes and do a small amount for the state taxes?

Normally, we get about $2,000 refund on federal tax and about $700 on state taxes


You need to check with your tax advisor on the tax status of the distribution. But the key is that you need to pay the right amount of tax somehow; you can have tax withheld from the annuities, or have more tax withheld from your salary, or make estimated tax payments.

If you determine that you will owe a tax penalty unless you increase your payments, it would be easier to use the withholding. The reason is that if you pay estimated tax, you normally have to pay it equally in all four quarters of the year, so you would owe a penalty for making the April 15 payment late. You can avoid this penalty by filling IRS form 2210 to prove that you earned most of your income later in the year, but that is a complicated form.

If you do have state tax withheld from the annuity or make estimated state tax payments, and you itemize your federal deductions, you will probably need to adjust your federal withholding on your salaries. You may need to fill out a new form W-4 with your employer claiming additional allowances because of the deductible state taxes.

And if you don't have to add to the withholding to avoid a penalty (because the amount already withheld for this year is enough to cover the minimum tax payment), you'll have a big tax bill next year; make sure you have the money available for that big tax bill (keeping it in a CD or bank account is a good idea), and adjust your withholding next year for the deduction on the big state tax bill.
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Re: Tax Withholding for inherited annuities

Postby JerseyKC » Mon May 31, 2010 9:51 am

grabiner wrote:
JerseyKC wrote:Have inherited 3 different annuities recently and am looking over the withholding information

The total amount if taking a lump sum is approximately $40,000. Our taxable income is $120,000 and we live in NJ > would it be worth it to have 25% withheld for federal taxes and do a small amount for the state taxes?

Normally, we get about $2,000 refund on federal tax and about $700 on state taxes


You need to check with your tax advisor on the tax status of the distribution. But the key is that you need to pay the right amount of tax somehow; you can have tax withheld from the annuities, or have more tax withheld from your salary, or make estimated tax payments.

If you determine that you will owe a tax penalty unless you increase your payments, it would be easier to use the withholding. The reason is that if you pay estimated tax, you normally have to pay it equally in all four quarters of the year, so you would owe a penalty for making the April 15 payment late. You can avoid this penalty by filling IRS form 2210 to prove that you earned most of your income later in the year, but that is a complicated form.

If you do have state tax withheld from the annuity or make estimated state tax payments, and you itemize your federal deductions, you will probably need to adjust your federal withholding on your salaries. You may need to fill out a new form W-4 with your employer claiming additional allowances because of the deductible state taxes.

And if you don't have to add to the withholding to avoid a penalty (because the amount already withheld for this year is enough to cover the minimum tax payment), you'll have a big tax bill next year; make sure you have the money available for that big tax bill (keeping it in a CD or bank account is a good idea), and adjust your withholding next year for the deduction on the big state tax bill.


Thanks grabiner > I will probably just do the withholding from the lump sum payout. That should get me close enough.

Looks like we'll do the catch up on tax loss carry-forwards this year instead of spreading it out over time as the annuity amount received goes on Sch D.
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Postby JerseyKC » Mon May 31, 2010 8:31 pm

Thanks for the follow up guys and the suggestions
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