The Expert in Tax Education. 2 Decedent’s Final and Fiduciary Returns The Expert in Tax Education.
-
Upload
erika-horton -
Category
Documents
-
view
228 -
download
4
Transcript of The Expert in Tax Education. 2 Decedent’s Final and Fiduciary Returns The Expert in Tax Education.
The Expert in Tax Education
2
Decedent’s Final and Fiduciary Returns
The Expert in Tax Education
The Expert in Tax Education
Developed by Kathy Hubbard, EA
Presented by XXXX
Summer 2014
Decedent’s Final and Fiduciary Returns
4
Objectives•To address common scenarios that small tax practitioners encounter with decedents' final and fiduciary returns,•To provide a quality fact base with ample references, worksheets and examples for the tax professional•To provide information specific to Texas.
5
The Final 1040
•Final Tax Year is January 1 - DOD•Final 1040 Year ends December 31•NO ES 2210 penalties, but full pay 4/15•Return due 4/15, extendable to 10/15•Full amount, no proration for
standard, over age 65 and/or blind deductions
exemption, incl if decedent was a dependent
6
1040 Filing RequirementsDepend Upon
Gross IncomeAgeFiling StatusOther Tax or Filing Obligations
7
Gross Income
•Controlled by both age and filing status,•Ranges from
$950 (dependent under age 65) to
$21,800 (married couple, both over age 65)
•Measured from January 1 to midnight on DOD
8
Age
For tax purposes, one reaches age 65 on the day before one’s 65th birthday
9
Filing Status
There are exceptions tothe customary status
and incomefiling rules.
10
Filing Status
If a married couple normally files jointly,even though they live apart, and one of them dies, a return must be filed if gross income is at least $3,800.
11
Filing Status
Where a couple files jointly, and one dies, and the surviving spouse remarries,
the decedent must file married separately!
This is a post-mortem impact on filing status.
12
Filing Status
If the decedent normally filed head of household,
but passed away less than 181 days into the year,
Status reverts to single (or mfs): The qualifying relatives were not in the decedent’s care for over half the year.
13
Filing Status
If Decedent is a Qualifying Child:
If the decedent is a child, s/he qualified the relative with whom she spent the majority of her days that final year for HOH.
14
Other Tax or Filing Obligations
•Taxes!•AMT•Uncollected SS, Medicare, RRTA•Recapture taxes•Self employment or church wages
15
Other Tax or Filing Obligations
•If 1040 not otherwise required, can file standalone:
Form 5329 additional tax on a qualified plan
Schedule H, household employment taxes
Form 8606 for non-deductible IRA contributions.
16
Other Tax or Filing Obligations
•Credits Require Filed ClaimEarned Income, child, prior year minimum tax, education and fuel credits
Withholdings and estimated tax payments.
17
Never OverlookSpecial Tax Forgiveness
Provisions
Mortally wounded warriors or civilians serving in combat zones,
injured and/or deceased victims and families of victims harmed by
terrorist attacks, and astronauts who perish in the line of duty.
18
Never Overlook
The particulars surrounding the passing of these military and civilian persons, and
The discreet types of tax relief applicable to their tax accounts and sometimes those of their families.
19
Never Overlook
Certain death benefits paid to survivors of public safety officers IF
Killed due to traumatic injuries sustained in the line of duty
After September 10, 2001Which are excluded from both income and estate taxes.
20
Who Signs the Return?The Personal
Representative!
21
Who is a Personal Representative?
Executor named in the will* Administrator appointed by the
court* Trustee of decedent’s trust* Surviving spouse Successor in possession of
property*
* File form 56, required, § 6903
22
Decedent’s and Successor's IncomePassed Without Probate
Ownership stylesCommunityJointJoint with surv’ship rightsLife estateBeneficiary designationsPay on DeathRemainderTrust property
Pass Under LWT
Testamentary transferSpecific bequestsResidual bequestsWill can “pour over” to a “living” trustWill can create trusts
23
Income Documents
W2s & 1099s issued through end of year or end of account:
Request reissued 1099, orIssue 1099 for nominee’s share
Review monthly detail on bank and brokerage statements
24
Income Documents con’tOn Decedent’s Return
Sch B Interest and Dividends in full, less nominee portion reduction Sch C,E,F Income and Expense to DOD (may need to report full 1099 and deduct nominee portion)Sch D True or 1099B gross, code N-nominee Pension/IRA/Other Reported portion on correct return line, “Post Mortem Income” is subtracted on Line 21.
On Beneficiary’s Return
Sch B Nominee portion
Schs C,E,F Post mortem income and expensesSch D Nominee portion, long term usually DOD cost basis § 1014Report on correct return line, if known, or line 21.
25
Income In Respect of a Decedent
IRD Arises From Certain Assets or Rights, and
Retains the Decedent’s“Tax Character”
26
§691 IRD Earned Before, Paid After
Interest, Dividends, Rents and Royalties,
Uncollected salaries, wages, vacation, bonus and sick pay,
Certain deferred compensation and stock option plans,
Annuity and retirement plans in excess of basis (ROTH IRA’s excepted,)
Difference between the face amount and decedent’s basis in an installment plan
27
Expenses in Respect of a Decedent
Mortgage InterestInvestment InterestProperty & state income taxesMedical Expenses paid within a year of deathBusiness and Investment Expenses
Review rules for depreciation, depletion and installment sales
Beware the HSA
Pre MortemContributions
DeductibleDistributions for
Medical Expenses not Taxable
Post MortemUnless spouse is
beneficiary,FMV of Accounts
Subject to Income TaxLess amounts used to
pay decedent’s medical expenses within 1 year of death.
29
The Fiduciary's Expenses
•Attorney Fees•Fiduciary and Estate Return Fees•Court Costs•Fiduciary Fees•Fiduciary Premium Bond Fees•Certain investment management fees and other costs incurred because of the entity’s status as an estate or trust § 67(e)(1).•Miscellaneous expenses which exceed 2% of the estate adjusted gross income.
30
Expenses Subject to 2% AGI Reduction
Preparation fees for forms 709 (gift) or 1040,Maintenance, utilities and insurance to protect the value of the non-trade or business property,Non unique portfolio management and advisory fees.
31
Pub 559: Table BSource A
Enter total from 1099
B Enter portion reportable on
decedent's final return
C Amount
reportable on estate's or
beneficiary's return
D
Part of column C
that is IRD*
Interest:
Bank XYZ 500 350 150 12
Credit Union 300 200 100 10
Gross Proceeds
ETC Stock 20,000 9,000 11,000
* Required for Form 706
32
Form 1041 Returns:Due Dates
On the 15th day of the 4th month after the tax year ends
Extend for 5 months on Form 7004
FYE established by initial return filed
33
Fiduciary Returns:Filing Requirements §6012
Gross IncomeAny Taxable IncomeBeneficiariesOther Tax or Filing Obligations
34
Gross Income
At least $600, orAny taxable income;Generally, uses same rules as individual income
determination §641(b)
35
Beneficiaries
Income notwithstanding, filing required if any beneficiaries are non resident aliens [Reg. 1.641(a)(2) and 1.61-1(a).]
For an estate (or trust) to claim a “distribution deduction” for funds paid to a beneficiary, Forms K1 must be attached to the return
36
Other Tax or Filing Situations
Claiming and having refunded income taxes withheld by payersDistributing final year excess deductions and losses to beneficiaries Owing taxes on wages paid to the decedents domestic employees by the estate
37
Post Mortem Planning
Claiming accrued interest income from Series EE Bonds on the decedent’s final lower tax bracket return,
Selecting fiscal or cash accounting method,
Selecting a fiscal year,Redeeming income and paying
expenses within a fiscal year.
38
Estimated Tax PaymentsNo ES payments due on decedent’s
final return or estate’s tax years ending before 2 years following DOD
No ES payments due if tax for current year <$1,000
No ES payments due if prior year tax on a full 12 month year was $0
Otherwise, follow the 100/110% individual safe harbor regime under §6654(I)
39
Estate vs. Trust
Estate
Special ES rules
Standard Deduction $600*
S-Corps are qualified shareholders
TrustOnly §6654(I) rules for ES
Standard Deduction either $300 or $100*
S-Corps are only allowable partners for 2 years
* No standard deduction allowed in the fiduciary return’s final year
40
Estate vs. Trust con’t
EstateCan select fiscal year end,
May allocate ES payments to beneficiaries in final year by filing form 1041-T by the 65th day of the calendar tax year.
Trust
Must use calendar year,
May allocate ES payments to beneficiaries any year by filing form 1041-T
41
Active Rental Participation
EstatesFor 2 years post DOD, if the decedent qualified for active participation, the estate qualifies, § 469(i)(4)After 2 years, same rules as trust
TrustsOnly active if the trust is actively participating --IRS says this means the trustee, butsome courts have said this means the beneficiaries …!
42
Qualified Revocable Trusts can Elect to be Taxed as Estates §645
Treats QRT as an estate, or QRT and Estate as the estate,File Form 8855 – review election due date variables, andCheck the “estate” and “645 election” boxes on 1041
43
The 65 Day Rule §663(b)
Available to both trusts and estates:Allows 65 days after the close of the tax year to determine and distribute income to beneficiaries
44
Example 1Estate Inflows & Outflows Total On Final 1041
IRA $ 5,000 $ 5,000Checking acct cash $ 30,000 0Reportable Income $ 5,000
Inflows marshaled $ 35,000
Court and Attorney Fees -$ 4,000 -$ 4,000Taxable Income $ 1,000
Net cash on hand $ 31,000
Estate Distributes All -$ 31,000
Form K-1 Box 5 Income $ 1,000
45
Example 2Estate Inflows & Outflows Total On Final 1041
IRA $ 5,000 $ 5,000Checking acct cash $ 30,000 0Reportable Income $ 5,000
Inflows marshaled $ 35,000
Court and Attorney Fees -$ 8,000 -$ 8,000Taxable Income - $ 3,000
Net cash on hand $ 28,000
Estate Distributes All -$ 28,000
Form K-1 Box 11 A - $ 3,000
46
The Decedent’s Home
The personal residence gets the step up in basis § 1014, andIf sold, closing expenses would generate
a loss -- non deductible for a personalloss, thus not deductible;
If occupied by one or more beneficiary,-that use is considered a distribution.
The Decedent’s Stuff
•If will says the kids (people) get the rest, and•If the executor/ heirs donate the stuff to a charity,•Then each heir donated a 1/X undivided interest in the stuff, and• The rules for individual non-cash donation documentation apply.
47
48
Distributable Net Income
(DNI) §643 & the
Distribution Deduction § 651
49
What is DNI?
Amount of income of the estate or trust for the taxable year determined under:
the terms of the governing instrument, andapplicable local law §643(b), but NOTThe Internal Revenue Code
50
Terms of the Governing Instrument
How many wills or trusts say that the executor or trustee should use the Internal Revenue Code and not local UPIA for preparing the 1041 returns and determining principal and income?!!
51
Now What?
READ THE ENTIRE WILL AND / OR TRUST!Be familiar with the Uniform Principal and
Income Act and the Uniform Prudent Investor Act.
52
Trust vs Estate?
Trusts have extended lifetimes and more conditional beneficiary structures; the UPIAswere designed to govern their asset preservation and management.
Decedent’s estates are generally short lived & designed to distribute all assets, but still come under § 643(b).
53
Fiduciary IncomeDerived from each states’ adoption of some form of the Uniform Principal and Income Act;Classifies receipts as “principal” and “income” (without regard to the IRC), for instance:Municipal interest and corporate bond interest are interest incomeEquities are principal; when stock is sold, the type of principal is exchanged from equity to cash, and remains classified as principal.
54
Net Exempt IncomeIf an estate has $8,000 in taxable interest income,
And $2,000 in municipal interest income,
Thus total income of $10,000, of which 20% is tax exempt,And it has $1,000 in administration expenses,Then it cannot deduct 20% of the administration expense from taxable income;Its NEI is $1,800 ($2,000 - $200);Similar perorations of expense required where some beneficiaries are exempt organizations.
55
DNI Formula § 643
Starts with taxable income,Adds back the exemption amountRemoves capital gain, andAdds in Net Exempt Income.
56
The Distribution Deduction
The lower of the amount distributed § 661(a)(2)
or The amount deductible under the DNI
rules, § 651(b),
andIncome is carried out first.
57
Texas Property CodeTitle 9, Trusts
Chapter 116, Uniform Principal and Income Act
116.005 Allocation Powers: Trustee may allocate between principal and income Chapter 117, Uniform Prudent Investor Act
58
Fiduciary Tax Rates for 2013If Taxable Income Is: The Tax Is:Not over $2,450 15% of the taxable income
Over $2,450 but not over $5,700 $367.50 plus 25% of the excess over $2,450
Over $5,700 but not over $8,750 $1,180 plus 28% of the excess over $5,700
Over $8,750 but not over $11,950 $2,034 plus 33% of the excess over $8,750
Over $11,950 $3,090 plus 39.6% of the excess over $11,950
59
2013 Exemption Amounts for AMT
Under § 55(b)(1) the excess taxable income above which the 28% tax rate applies is $179,500The amounts used under § 55(d)(3) to
determine the phase out of the exemption amounts is $ 76,950
60
Net Investment Income Tax
Beginning 2013:
NIIT is 3.8% on the lesser ofNet investment income, orThe excess of the MAGI over
the threshold amount
61
When are Trusts and Estates Liable for NIIT?
When they have undistributed Net Investment Income, and
Have AGI over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (for tax year 2013, $11,950).
62
Any Special Circumstances?
There are special computational rules for certain unique types of trusts, such as Charitable Remainder Trusts and Electing Small Business Trusts, which can be found in the proposedregulations.
63
Any Exceptions?
Grantor Trusts Charitable Trusts Retirement Trusts Real Estate Investment Trusts Common Trust Funds
64
NII IncludesInterest,Dividends, Capital gains, Rental and royalty income,Non-qualified annuities,Income from businesses involved in trading of financial instruments or commodities,And businesses that are passive activities to the taxpayer (within the meaning of IRC § 469).
65
What Type of Gains?
To the extent that gains are not otherwise offsetby capital losses, the following gains arecommon examples of items taken into accountin computing Net Investment Income:Gains from the sale of stocks, bonds, and
mutual funds, andCapital gain distributions from mutual funds.
66
And NON Investment Income Is?
Wages,Unemployment compensation; Operating income from a non-passive business,Social Security Benefits,Alimony, tax-exempt interest,Self-employment income,Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102), and distributions from certain Qualified Plans (those described in IRC §§ 401(a), 403(a), 403(b), 408, 408A, or 457(b)).
What Expenses Reduce NII?
Deductions that are properly allocable to items ofGross Investment Income, such as:
• Investment interest expense, • Investment advisory and brokerage fees, • Expenses related to rental and royalty income, • And state and local income taxes properly
allocable to items included in Net Investment Income.
NIIT Thresholds for 1040 and 1041
• 1040
• MFJ, QW $250,000• HoH, S $200,000• MFS $125,000
• NOT indexed • for inflation
• 1041
• Dollar amount of the• highest income tax • bracket for such taxable• year, for 2013 =
$11,950
• THUS, indexed• for inflation
A New Form for NIIT?
• One New Form for both Forms 1040 & 1041
• Computes the NII Base in the first section,
• Carries to different tax computation sections for individuals and fiduciaries.
70
They Moved The Cheese!
The inheritance tax was the main estate planning obstacle for the middle class, before the indexed $5M exemption & the portable spousal exemption became law.
The challenge now is the NIIT!!!
71
Net Investment Income Tax Avoidance
Distribute IncomeDecant AssetsDisclaim Assets within 9 months, if possible and practical
72
Appendix
73
Documents Needed to Prepare 1041 Will and Order Admitting Will to ProbateLetters Testamentary / of AdministrationInventory of Property (If from the probate records, will not include non-probate property nor liabilities)Bank and brokerage statements with detail -- mandatory for determining pre and post mortem transactions (including those passing outside probate)
74
Documents Needed to Prepare 1041 con't
Roster of Name, address and SSN (or EIN) of
each named beneficiary, with amounts, dates & descriptions of all distributions to each
Copy of Form 706 if filedAll income forms (W2, 1099)Prepare: A DOD Balance Sheet at FMV, unless a 706 is filed with alternate date is elected)Prepare: Table B
75
Workpapers to Prepare for Form1041
A DOD Balance Sheet at FMV, (unless a 706 is filed with alternate date is elected)
Table B or Equivalent
76
Governing Documents Analysis
N/A No Yes
Personal Representative?
Alternative Representative?
Independent?
Bonded?
Fee or Payment Allowed to Fiduciary?
Specific Bequests?
--Name Each
77
Governing Documents Analysis N/A No Yes
Establishment of Trusts?
-- Name Each Trust, Trustee & Beneficiary
--Distributions required? Otherwise allowed? For?
--Dissolution Determined by?
Methods for Determining Income & Principal Named?
Charitable Beneficiaries?
Remainder & Income Beneficiaries?
Residual Beneficiaries?
NAEA created this educational program as part of its firm commitment to providing up-to-date, convenient continuing education that focuses on the issues that members identify as top priorities. Members are invited to suggest further areas of study or to submit presentations by contacting [email protected].
National Association of Enrolled Agents1730 Rhode Island Ave, NW Ste 400Washington, DC 20036Toll free: 855-880-NAEAwww.naea.org