Tax Attic: Taxes on inheritances

Most tax preparers enjoy talking about taxes. That’s fortunate because it’s now a topic that comes up year round. Back when I started in the business, 1978, it didn’t seem to be quite as important. The first 10 years of my professional career were spent with the world’s largest tax preparation company, H&R Block. I started as a part-time preparer; became the full-time City of Grand Rapids’ Assistant District Manager; and was promoted to the City of Greenville’s District Manager. The Greenville district included many of the smaller offices in West Michigan including those to the east of Ionia and Portland, to the south of Wayland and Plainwell, along the Lake Michigan coast of Hamilton, Zeeland, Whitehall, Hart and Ludington, to the north and east of Edmore, Mt. Pleasant, Clare, and Harrison, and then most of the towns right around here such as Cedar Springs, Big Rapids, Sparta, Kent City, Lowell, Belding and Rockford. It was great training for owning my own business and great training for preparing taxes. Back then, however, from May through December, we were open three days per week. Some entire days the phone didn’t ring and no one opened the door other than me coming and going. There was no texting or emails or internet. It might have been actually a little boring some days. It wasn’t that taxes weren’t important but the world of income tax just didn’t seem to be an everyday topic. Today, we are open four days per week; the phone starts ringing when we open; and emails and texts come in at all times of the day and night. Boring is not in the vocabulary. Taxes are an everyday topic and, fortunately we like talking about taxes. One of those topics that we get a lot of questions on is the subject of inheritances. Common questions include ones like these. What happens when property is inherited? Who owes the taxes on the sale of inherited property? How much are the taxes on the sale of inherited property? Let’s take a little time and discuss these questions.

 

What exactly does happen when property is inherited? In the over-whelming amount of the time, property that is owned by a person who deceases is passed on to inheritor/inheritors at the fair market value at the date of death. There are actually two different taxes that could be assessed. First, federal estate tax could be due. Currently, as long as the total fair market value of all the property owned by the decedent is less than $5,450,000, there are no federal estate taxes to be paid. If the estate is more than $5,450,000, taxes could be due at a 40% tax rate. That’s the bad news. The good news is that very few people have estates having a value of more that $5,450,000. Actually, a married couple can each have a $5,450,000 estate so, in reality, between them no tax will be due on the first $10,900,000 of estate value. The estate includes all property owned by the decedent including retirement plans such as IRAs, 401ks, SEPs, and Simple Plans, real estate such as personal residence homes, vacation homes, and investment property, all property owned in brokerage accounts and bank accounts, vehicles, and all personal property. Once the total fair market value of the estate is determined, that tells us what return has to be filed. If it’s over $5,450,000, an Estate Tax Return, Form 706, has to be filed. If it’s under the $5,450,000, a Form 706 may be filed but would not be required. The Form 706 numbers are typically fixed by the Fair Market Value at the date of death. However, an Estate/Trust Tax Return, Form 1041, most likely will have to be filed. The Form 1041 reports the sale of all property owned as detailed above and any income earned by the estate after the decedent’s date of death. The Form 1041 figures start at the moment of death but only report income earned by the estate. Next week, we will discuss how the figures are determined that are entered on the Form 1041. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at www.actiontaxservice.com