Note: This is a complicated subject. We will only
touch on some topics. We recommend that you talk these issues over
with an attorney and a CPA.
Inheritance tax is a tax paid by a beneficiary
after receiving inheritance. If the inheritance tax rate is 10%, and
you inherit $100, you pay $10 in inheritance tax.
The good news is that since 1980 in Colorado there is no
inheritance tax, and there is no US "inheritance tax," but there are other
taxes that can reduce inheritance.
Estate tax is a tax on assets typically valued at the
date of death. Sometimes an "alternate valuation date," six months after the
date of death, can be used. If the asset value exceeds the "exemption"
amount, there can be a significant estate tax at rates between 35% and 55%.
Currently the estate tax has an exemption amount of over $5
million and a tax rate of 35%.
Estate INCOME Tax
Estate income tax is a tax on income, like interest and
dividends. However, estate income tax returns can be fairly complex,
even if there is very little income.
If you are a personal representative or executor, you
should make sure your accountant knows how to prepare an estate income tax
returns (Form 1041). Only a small percent of Form 1040 preparers are capable
of preparing estate income tax returns.
Beneficiaries commonly receive taxable income from
estates. This should not be confused with inheritance tax. If you inherit
$1,000 of stock and you receive $50 in dividends from that stock, you will
pay tax on the $50 of dividends. This is where a good tax preparer
comes in handy. If you have certain types of estate expenses, some of those
expenses can reduce the $50 of dividend income. You might even end up with
tax losses and deductions rather than taxable income!
The estate can take deductions for "Administrative
Expenses" as long as a proper election (statement) is made in the estate
income tax return.
If there is a trust involved with the estate, serious
thought should be given to making a Section 645 election. By making a
Section 645 election, the tax returns for the trust and estate can be done
with one federal tax return instead of two. There are other reasons,
including year-end and estimated tax considerations, for making the Section
In the last year of an estate beneficiaries might be able
to deduct expenses that the estate was unable to deduct. Again, an
accountant that understands estate and trust tax can pay off.
An estate that holds a residence has some special tax
issues. Is there a loss? Is it deductible? Were there fix up costs? These
may require special treatment. It is our experience that, when an
estate sells a house, heirs usually get to deduct a loss that will reduce
their individual taxes.
Do You Need Some Assistance?
Please feel free to call us at 720-493-4804.
If you would like to discuss estate or trust issues, there is no charge
for the initial meeting. At that meeting we can discuss tax and issues
that are critical for trustees and personal representatives to know to avoid
common costly mistakes. For
many estate or trust related issues, we can assist you at a much lower price
than using an attorney. However, if you do need an attorney, we know
many attorneys that specialize in this area.
The information contained here are simplifications of complex subjects. Talk to your CPA
attorney if you want more information.