Good News and Bad News – Reporting Assets’ Basis Upon Death
As with life, changes in the tax law can be good, as when tax rates are reduced, or bad, as when tax rates go up or when the tax is applied to less income. Such is the case with recent changes in the estate tax law, which also affect income tax law. Regarding these recent changes, the good significantly outweighs the bad.
So what is the good news? The amount subject to estate tax has been increased ($5 million per person, with inflation adjustment $5, 450,000). So a married couple can protect $10.9 before paying estate tax. Also good news is that the estate tax rate has been reduced - still a hefty 40% but less than the prior 55% rate.
So what is the bad news? None really, except for some added complication. Now, effective July 31, 2015, executors filing estate tax returns must include IRS Form 8971 with Form 706, the estate tax return. Form 8971 is required so that the value of the assets reported on the estate tax return matches the value of the assets reported by a beneficiary upon the sale of the assets. Thus, to avoid the IRS missing out on estate tax and income tax by inconsistent reporting, the asset’s "basis" must be the same for both estate and income tax purposes.
Example: Dad dies and Executor reports the value of Dad’s vacation home at $1 million. Daughter inherits the vacation home and then sells it for $2.2 million. She reports the inherited home’s basis at $1.8 million for income tax purposes, not the $1 million reported by the Executor. Hence, Daughter reports $400,000 of gain, not $1.2 million of gain.
Form 8971 will make it easier for the IRS to track an asset’s basis. Form 8971 will require more information and more stringent reporting for executors, and for the accountants and attorneys preparing estate tax returns.