Posted on January 30, 2010 by Greg Herman-Giddens

Income Taxation of Estates - a Brief Overview

In North Carolina it is not uncommon for persons to handle administration of a decedent's estate without hiring a lawyer or an accountant.  Because of the complexity of the law and the likelihood that certain requirements or opportunities will be overlooked, I certainly don't recommend going it alone.  This post is not intended to be a do-it-yourself guide, but simply an overview of the basic process.  Complying with income tax requirements is the most complex part of the majority of estates.

A deceased individual's tax year ends as of the date of death.  Thus, all of the items of income and deduction prior to that date are reported on Form 1040.  The tax year for the estate begins on the date of death, and generally ends on the last day of the month 11 months later.  A separate tax id number for the estate is necessary and must be obtained from the IRS.  The tax id number is provided to all financial institutions in which the decedent owned an account for income reporting purposes, and is used for the estate checking account.

Estates report interest, dividends and capital gains just as individuals do, but IRS Form 1041, the tax return for estates and trusts, is significantly different form Form 1040.  The top federal rate of 35% (for 2010) is reached at just $11,200 of taxable income, versus about $373,000 for individuals.  However, to the extent there are distributions to the beneficiaries in a taxable year of the estate (except for distributions of specific amount or assets per the terms of the will), net income is "carried out" and is reported as income to the beneficiaries on Schedule K-1.  Capital gain is generally taxed to the estate.

Certain expenses can be deducted on the 1041, such as attorneys and accountants fees, executor's commissions, court fees, appraisals and bank charges.  Funeral expenses and debts of the decedent are not deductible.

On the final return, if there is a net loss, the loss can be carried out to the beneficiaries.  On all but the final return, a $600 exemption is allowed.

The North Carolina income tax return for estates, D-407, uses information from the federal return in the manner of the NC individual return, D-400, does.

Taxation of trusts is similar, but there are a few differences.  The returns for estates and a decedent's living trust can be combined by filing a special election form.

Finally, the federal and North Carolina estate taxes are a completely different topic.  This year there is no estate tax, but it will return in 2011.

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Posted on July 2, 2008 by Greg Herman-Giddens

Extension Period Shortened for Forms 1065, 1041and 8804

Today the IRS issued temporary and proposed regulations that reduce the extension of time to file tax returns for certain businesses that generate Schedules K-1 and other similar statements to five months. (The current period is six months.)

This change will be effective for extension requests for tax returns due on or after January 1, 2009, and applies to entities that file the following returns and forms that have a tax year ending on or after September 30, 2008:

• Form 1065, U.S. Return of Partnership Income
• Form 1041, U.S. Income Tax Return for Estates & Trusts
• Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)

The final and temporary regulations finalize the simplified procedures for obtaining an automatic extension of time to file returns, doing away with the requirements for a signature and an explanation of the need for an extension of time to file. They also complete the elimination of Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return, granting individual taxpayers an automatic six-month extension with their filing of Form 4868, Application for Automatic Extension of Time to File a U.S. Individual Income Tax Return.

Thanks to Bob Keebler, CPA for this news.
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Posted on January 15, 2007 by Greg Herman-Giddens

New Charitable IRA Rollover Guidance

Professor Christopher Hoyt of the University of Missouri School of Law has proved a useful summary of IRS Notice 2007-7, 2007-5 IRB 1, which provides guidance about Charitable IRA Rollovers.  This law, which became effective in 2006, allows anyone over age 70 1/2 to have up to $100,000 distributed directly to a qualifying charity and be excluded from income.

1. Yes, charitable IRA distributions can satisfy pledges without violating the self-dealing prohibited transaction rules. "The Department of Labor, which has interpretive jurisdiction with respect to section 4975(d), has advised Treasury and the IRS that a distribution made by an IRA trustee directly to a section 170(b)(1)(A) organization (as permitted by section 408(d)(8)(B)(i)) will be treated as a receipt by the IRA owner under section 4975(d)(9), and thus would not constitute a prohibited transaction. This would be true even if the individual for whose benefit the IRA is maintained had an outstanding pledge to the receiving charitable organization."

2. Yes, a person over age 70 ½ who is the beneficiary of an inherited IRA can take advantage of the charitable IRA exclusion.

3. The prohibition of using an SEP IRA or a SIMPLE IRA for the charitable exclusion only applies to an "ongoing " SEP IRA or SIMPLE IRA. Such an IRA is an ongoing IRA only if a contribution was made to it during the year. Thus , a retired individual who had an SEP IRA or a SIMPLE IRA to which contributions were made during a working career but who is now retired can make charitable distributions from that IRA since no employer contributions were deposited in the same year.

4. No withholding of income taxes -- A qualified charitable distribution is not subject to withholding under section 3405 because an IRA owner that requests such a distribution is deemed to have elected out of withholding under section 3405(a)(2).

5. The exclusion applies to any such charitable distribution made during 2006, even those made before the law was enacted on August 17, 2006. This may be advantageous to people who have "IRA checkbooks" (typically at brokerage houses) where they can write checks directly from an IRA. A person over age 70 ½ who wrote such a check to a qualifying charity early in 2006 can take advantage of the exclusion.

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