Inheritance Question

[Kilted1]

Hello,
My wife and her 4 siblings recently inherited an annuity from their uncle who passed away last summer. They will each receive around 20K. I have the paperwork here, and it asks if we would like federal income tax withheld (10%). Two questions:

1. Is inherited money from an annuity taxable, and considered part of our 2007 income?

2. If it is taxable, should I have the insurance company withhold the 10% now, or elect not to, and invest that money for the year (high yield savings account), and pay the 10% at tax time next year?

We only have three options with the money here: lump sum, leave as an open claim for no more than 3 years, annuitize the money with the current company. We will be taking as a lump sum distribution, paying off a car loan, and investing the rest into our IRAs. Thank you all!

[Scanner]

That's really an accountant question and one specific to the state you live in.

I need to make that disclaimer and it's serious, not just lip service.

However, it is my understanding under Federal guidelines, that any money under 1 million (may not be this but not anywhere near $20,000) is not subject to inheritance tax.

However, yes, it would be regarded as income for that year. So, instead of double taxing, you would just have single taxing.

This doesn't take into account state taxes and actually, I didn't think an annuity could be "bequeathed" - tells you what I knew.

I wouldn't spend the money just yet - I'd keep it in a muni-bond fund specific to your state account. And I would call your accountant for advice - I know in the self-employment world that I live in, you just can't hold your tax money all year - you have to make quarterly estimates (or else I would hold it all year and earn interest).

He/she may advise you to send that 10% in now. If not, then no, I'd hold onto it, let it earn interest, pay tax on it next year, and then spend it.

[creditcardfree]

My gut says that it is taxable. Most annuities are a way to invest and tax shelter the money for the owner...so I'm sure the IRS will want taxes on that now that it is leaving the annuity. It would be considered ordinary income on your return as taxable income.

The best way to get the answer is to ask the an accountant or the insurance company would probably be able to tell you as they should be trained to answer those type of questions.

If you don't have them withhold, I would hold on to at least 15-20% of the money until the taxes are due. That way you have the money on hand at tax time.