One of the most tax inefficient assets to inherit is a traditional IRA or retirement plan.
“Not only are IRAs or retirement plans included in the estate and potentially subject to federal estate tax and state death taxes, but they’ll also be subject to income tax when the beneficiary starts receiving distributions from the account,” said Tim Laffey, head of tax policy and research at Rockefeller Capital Management in Philadelphia. “The qualified charitable distributions amount can satisfy all or a portion of a taxpayer’s required minimum distribution and it is not included in the taxpayer’s adjusted gross income for the year.”
Some taxpayers also think that charitable donations result in a dollar-for-dollar reduction of taxes. “Not the case,” said Bruce Benjamin, shareholder and a senior partner with Drucker & Scaccetti in Philadelphia. “Charitable contributions are a deduction against income as opposed to a credit against taxes. Your tax benefit of the deduction is dependent on your marginal tax bracket in that given year.”