Friday, February 29, 2008

Tax on Inheritances

Any money and property you receive as inheritance, you (the receiver) do pay any federal tax except if you inherit a traditional IRA. This is true even for properties inherited in foreign countries or from a foreign person. There may be state tax on the inheritances so you should check at the state web site. For most of the States there is no inheritance tax. PA state has tax on inheritances.

Inherited Property
If you inherit a property in a year other than 2010, your cost basis is the valuation (Fair Market Value) of the property at the date of the decedent's death or the FMV (Fair Market Value) on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. That is your cost basis is the "step-up" basis. If you sell the inherited property at a price up to your cost basis, you don't have any profit. However, if you sell the property at price more than the cost basis to you, then you must pay the taxes on the profit (sale price minus your cost basis). You must report the sale on schedule D of Form 1040. Profit from an inherited property is always a long term capital regardless of when you inherited it.

Federal Estate Exclusion for 2012 & 2013
In 2011 the federal estate-tax exclusion was set permanently at $5 million and is indexed for inflation. For 2012 the basic federal estate exclusion limit is $5,120,000 and the top estate-tax rate is 35%. In 2013, the basic federal estate exclusion limit is $5,250,000 and the top estate-tax rate is 40%.

Choices for 2010
For 2010, estates have two choices. Either pay no estate tax or pay 35% estate tax on assets over 5 million.
1. If you inherit property in 2010 from a estate that chose to avail unlimited estate tax exemption, the basis of inherited property remains the same as it was for the deceased owner. Your cost basis is not "step-up" but it is the "carry-over". However, you can choose to take your cost basis as "step-up" for only $1.3 million of the property. For any amount inherited over $1.3 million, your cost basis will be the smaller of the deceased owner's basis or the FMV on the date of the death. the surviving spouse will receive an additional $3 million basis "step-up".
2. If you inherit property in 2010 from a estate that is over 5 million and that paid 35% estate tax on assets over 5 million, you can claim stepped-up basis.

Inherited Traditional IRA or Retirement Fund
If you inherit a traditional IRA, you are called a beneficiary. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. All income in a traditional IRA is taxed as ordinary income. Any capital gains within the IRA receive no special treatment that is it is treated as an ordinary gain.

You can withdraw money from inherited IRA without early withdrawal penalty even before you are 59 1/2. You should receive a Form 1099R from the trustee for the IRA. Get a copy of it from the trustee if you no longer have it. Usually there is federal withholding on the distribution, most often 20%.

Inheritance from Foreign Sources & Form 3520
Any inheritance is not a taxable income. However, since it is coming from a foreign country, the IRS wants to make sure that it is a actually a gift or inheritance. The receiver must file File 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. The form 3520 is due on the date of your return including extensions.

You file Form 3520 if you are a U.S. person who, during the current tax year, received either
a. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or
b. More than $13,561 (for 2008) from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
Note: You may also be required to file Form TD F 90-22.1. Report of Foreign and Bank and Financial Accounts.

Estate Tax and Estate Tax ReturnMost estates are not subject to the estate tax. An estate tax return generally will not be needed unless the estate is worth more than the applicable exclusion amount for the year of death. For 2006, 2007 and 2008 the exclusion amount is 2 million and for 2009 the amount is 3.5 million. For 2010, estates have two choices. Either pay no estate tax that is exclusion amount is unlimited or pay 35% estate tax on assets over 5 million. In 2011 and 2012 and estate tax exclusion amount is 5 million and the estate tax rate is 35%.

The personal representative must file an estate tax return, Form 706, if the gross estate, plus any adjusted taxable gifts and specific gift tax exemption, is more than the filing requirement for the year of death. The personal representative must also file the previous years income tax returns (if not already filed) and the final income tax return if required.

The personal representative is an executor, administrator or anyone who is in charge of the decedent’s property. Generally the executor is named in a decedent’s will to administer the estate and to distribute properties as the decedent has directed. The duties of personal representative are to collect all the decedent's assets, pay the creditors, and distribute the remaining assets to the heirs or other beneficiaries.

Schedule K-1 (Form 1041)As a beneficiary of a estate you may get Schedule K-1 from the personal representative of the estate. The amount shown in boxes 1 through 14 of Schedule K-1 show your share of estate's or trust's income, credits, deductions, etc. Generally, you must report items shown on Schedule K-1 the same way that the estate or trust treated the items on the return. For Form 1040 filers, page 2 of Schedule K-1 provides summarized reporting information.

Community property. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be included in the decedent's gross estate, whether or not the estate must file a return.

List of Articles on the U.S. Taxes
Your Filing Status
1. Filing Status for Married
2. Filing Status: Head of Household
Exemptions for Dependents
1. Requirements for claiming a dependent
2. Child of separated or divorced parents
Filing Requirements
1. Filing Requirement for a Dependent
Your Income
1. W2 vs 1099-Misc: Employee vs Independent Contractor
2. Tax Filing by Self Employed Sole Proprietor or Independent
3. Filing W4 Employee’s Withholding Allowance Certificate
Your Foreign Income
1. U.S. Citizen or Resident with Foreign Income
2. Foreign Bank and Financial Accounts
Income Adjustment and deductions
1. Moving Expenses
2. Itemized deductions
3. Student Loan Interest Deductions
Income Adjustments -- Retirement Plans
1. Trad IRA and Roth IRA
2. Elective Deferrals 401(k) Plans
Status of Your Tax Refund
1. When will I get my tax refund?
U.S. Gift tax and Inheritance Tax
1. The U.S. Gift Tax
2. Tax on Inheritances
Sale of Your Home
1. Profit from the Sale of Your Home
2008 Economics Stimulus Act
1. Are You Eligible for 2008 Stimulus Tax Rebate Payment?
2. 2008 Economics Stimulus Act -- Benefits to Businesses

Tax for Aliens
1. U.S. Tax Filing Requirements for Non-Residents
2. Substantial Presence Test
3. Social Security and Medicare (FICA) Taxes for Non-resident Exempt Individual
4. U.S. Tax Treaties for Professors, Teachers and Researchers
5. U.S. Tax Treaties for Students and Apprentices
6. Mandatory Reporting of Foreign Bank and Financial Accounts

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