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bentay2727 · Dec 9, 2008, 04:54 PM

My brother and I were left an annuity form my mom when she passed, my questions is do I add this to my earned income taxes and possibly raising to the next tax bracket or will I be taxed separate on my income and the annuity? Also I'm in NC, do I have to pay state taxes? The money was in the annunity was earned in a state that does not have state taxes.
Thanks so much:)

MukatA · Dec 10, 2008, 12:29 AM

Annuity will be added to your income. Next tax bracket does not mean that the tax on the income without annuity will also increase. Only the annuity income may come in the next tax bracket.

ebaines · Dec 10, 2008, 11:34 AM

Please clarify your question about NC taxes. You say the annuity was "earned in a state that does not have state taxes" - what does that mean? If the annuity has been changed over to your name as the new owner, then all that matters is where you live. It does not matter where your mother lived. So yes, you will pay NC income taxes on it.

To clarify what MukatA said - your tax bracket is the rate at which your marginal income dollars are taxed, and is determind by your total income. So yes, the annuity may push you to a higher bracket, which means that you will keep less of your incremental income.

bentay2727 · Dec 10, 2008, 12:53 PM

Originally Posted by ebaines

Please clarify your question about NC taxes. You say the annuity was "earned in a state that does not have state taxes" - what does that mean? If the annuity has been changed over to your name as the new owner, then all that matters is where you live. It does not matter where your mother lived. So yes, you will pay NC income taxes on it.

To clarify what MukatA said - your tax bracket is the rate at which your marginal income dollars are taxed, and is determind by your total income. So yes, the annuity may push you to a higher bracket, which means that you will keep less of your incremental income.

The income was earned in Florida and residents of that state do not pay state income tax. If the annuity was 104,500 and the earned income is 52k what are the estimated taxes owed?

Thanks

ebaines · Dec 10, 2008, 01:19 PM

What do you mean by "The income was earned in florida?" Isn't this income that has been earned in the time after you inherited the annuity? That's how I interpreted your question, and if so, then you earned the income as an NC rsident and so NC taxes are due and payable by you.

However, if you are asking about taxes that your mother's estate may owe based on income earned while she was still alive, that's a different story. Is that what you're asking?

bentay2727 · Dec 10, 2008, 02:51 PM

Originally Posted by ebaines

What do you mean by "The income was earned in florida?" Isn't this income that has been earned in the time after you inherited the annuity? That's how I interpreted your question, and if so, then you earned the income as an NC rsident and so NC taxes are due and payable by you.

However, if you are asking about taxes that your mother's estate may owe based on income earned while she was still alive, that's a different story. Is that what you're asking?

Yes, let me clarify. The annuity was income my mother earned while working in Florida prior to retirement and put away for a rainy day, she passed away and left it to my brother and I, apprx 104K each. I'm asking what the tax penalties will be on cashing it out and if it is to be combined with my earned income before it is taxed. If so that would put me in a higher tax bracket.
Sorry for the confusion.

ebaines · Dec 10, 2008, 03:43 PM

Unfortunately annuities are a lousy way for people to pass wealth on to their heirs. Unlike stocks, the value of an annuity is not "stepped up" upon the owner's death, and consequently the heirs end up paying taxes on the full appreciation of the annuity. So it seems you are stuck having to include it in your income for tax purposes, if you have cashed the annuity in. This will be added to your other income and so yes, it may push you into a higher tax bracket. If you have not yet cashed it in, you may be able to roll the annuity over into your own tax-deferred account. The details are complicated - here's an article that gives an overview:
A Primer on Inheriting an Annuity

In addition, the full value of the annuity is included in the value of the estate, so if your mother's estate was large enough to trigger estate taxes you would lose a significant fraction of its value in estate taxes. This is only a concern if your mother's estate is valued at more than $2 million.