Good point about state taxes. Do you know which states are better or worse for inherited annuity taxes? I'm in Texas and wondering if I should expect any state-specific issues.

Texas is actually one of the better states for this situation since they don't have a state income tax. You'll only need to worry about the federal tax implications of your inherited annuity. States like California, New York, and New Jersey tend to be more complicated because they not only have state income tax on the taxable portion but sometimes have different rules than the federal government about how much of the annuity is considered taxable.

Good news - the 10% early withdrawal penalty generally doesn't apply to inherited annuities, even if you're under 59 1/2. This is one of the exceptions in the tax code specifically for death benefits. You'll still owe regular income tax on the taxable portion, but you escape the penalty that would normally apply to early withdrawals.

I didn't know about first time abatement for state taxes! Do you know which states offer this? I've always filed and paid on time before this year.

Not all states offer it, but quite a few do. California, Illinois, Massachusetts, and New York are some of the larger states that have some version of penalty abatement for first-time issues. Some call it "reasonable cause" relief rather than first-time abatement. The key is to request it explicitly - they almost never offer it automatically. You typically need to have a clean compliance history for the past 3-4 years to qualify. The requirements vary by state, but it's definitely worth asking about when you call to set up your payment plan.

I did this last year. The penalties and interest only apply to the unpaid portion. So if you owe $1000 and pay $700 by the deadline, you'll only be charged penalties on the remaining $300. Definitely better than paying nothing by the deadline!

Wait, I thought you only needed to file Form 709 if you exceed the annual exclusion? My husband and I gave our son $35,000 last year for his wedding and we didn't file anything. Did we mess up?

You're partially correct. If the total gift from both of you was $35,000 and you each contributed from your separate accounts (or you're in a community property state), then each of you gave less than the $18,000 individual annual exclusion, so no Form 709 would be required. However, if one spouse provided all the funds but you want to consider it as coming from both of you (to use both exemptions), then yes, you would need to file Form 709 to elect gift-splitting. This is a common misunderstanding. If the money came from a joint account or primarily from one spouse, you should technically file to properly split the gift. If you each wrote separate checks under the individual exclusion amount, you're likely fine.

I used TurboTax to file Form 709 last year and it was... not great. The gift tax portion feels like an afterthought in the software. It technically works, but the guidance was minimal and I wasn't confident I was doing it right, especially for the gift splitting election. If you're comfortable with tax forms and have a straightforward situation, it might be fine. But I ended up consulting with a tax pro anyway after attempting it myself, so I probably should have just started there and saved the headache.

Thanks, that's really good to know! Can I just move my existing savings directly into a Roth IRA? And do banks offer these or do I need to go somewhere special?

You can definitely move your savings into a Roth IRA, but there are annual contribution limits ($6,000 for 2025 if you're under 50). Your regular bank might offer them, but typically people open them with investment companies like Vanguard, Fidelity, or Charles Schwab. The advantage is that in a Roth IRA, you can invest in things that potentially grow much faster than a savings account - like index funds that might return 7-10% annually compared to the 1-2% you'd get from a high-yield savings account. Just remember that while you can withdraw contributions anytime, you generally can't touch the earnings until retirement age without penalties.

Any specific recommendations for good high yield accounts? I hear ads for them all the time but not sure which ones are legit.

Thanks for this info! Do I need to wait until I've paid everything off before requesting the penalty abatement? And is there a specific timeframe I need to submit the form within?

You don't need to wait until everything is paid off to request penalty abatement. You can submit Form 843 after the penalties have been assessed, which typically happens after you file your return. There's generally a 3-year timeframe for requesting abatement, starting from when you filed the return or paid the tax, whichever is later. So you have some time, but I wouldn't procrastinate. It's usually best to set up your payment plan first and then submit the abatement request afterward.

The IRS calculator is good but I found it really confusing tbh. If you want something simpler, the tax withholding estimator on SmartAsset is more user friendly. Just google "smartasset tax withholding calculator" and it should come up.