Tax Preparation FAQs

Below are questions our tax specialists often get. To read an answer to a question, click on the question.

Can I file Head of Household?

You can use the Head of Household filing status if you meet all of the following requirements:

  • You are a resident or citizen of the United States (or a resident of Mexico or Canada, invoking certain tax treaty clauses).
  • You are unmarried or considered unmarried on the last day of the year and file a separate tax return with a qualifying child.
  • You are considered unmarried if a spouse did not live in the home during the last 6 months of the year, and your home was the main home of your child, stepchild, or foster child for more than half the year.
  • You paid more than half the cost of keeping up a home for the year. You cannot use the Head of Household filing status if more than half your income
  • The child or dependent lived with you
What is a Joint Tax Return?

Couples who are residents or citizens of the United States and legally married on the last day of a calendar year file a joint tax return. They can also choose to file separate returns, although in most cases that is not an advantageous filing status.

Do I have to file a joint tax return with my same-sex spouse?

For federal tax purposes, if your marriage was authorized under the laws of a state or foreign country that recognizes same-sex marriages, you must follow the rules for filing as all other married couples. Generally, this means you must use the Married Filing Joint or Married Filing Separate status.

What is earned income?

Earned income is pay for personal services performed, such as wages, salaries, or professional fees.

What is unearned income?

Income from sources such as investments, unemployment compensation, insurance payouts, and pensions.

When do I file a Schedule C?

When you are reporting income and expenses related to self-employment and certain income reported on a 1099-MISC.

Should I keep copies of my tax returns and other tax forms?

Yes. Always keep copies of your tax return, W-2, 1042-S, 1099 bank interest statements and any other pertinent forms as proof that you have filed. The IRS can audit individual returns for up to 3 years following the filing deadline and your tax records are essential in proving your case. Therefore, you should save your documents at least three years, although it can’t hurt to save them for as long as you have storage space.

What is e-filing?

E-filing is short for electronic filing. It refers to filing your return over computer networks rather than through the mail. It is a quicker and more secure way of filing your tax return. You also get your refund quicker when you file electronically. It is the IRS’s preferred method of tax return filing, as it is cheaper and simpler for them to process the tax returns.

What is the difference between Form 1040 and Form 1040EZ?

The 1040EZ is the simplest tax form. You can use it if your income is less than $100,000 per year and is from wages, salary, and tips reported on a W2, from unemployment compensation, your taxable interest is not more than $1,500, and you do not itemize your deductions. You cannot use a 1040EZ if you plan to claim dependents.

What is the difference between Form 1040A and Form 1040NR?

The 1040A is a simplified tax form that citizens and permanent residents of the United States use to file their tax returns. Form 1040NR is used by non-resident aliens who need to report income taxable in the U.S.

What are Inheritance taxes?

The Internal Revenue Service collects the estate tax on all U.S. citizens and residents. The tax is levied on the deceased’s estate as a whole, filed on a single estate tax return and paid out of the estate’s funds. The U.S. government imposes no inheritance tax. States, however, may impose an inheritance tax on beneficiaries who receive property from the deceased. These taxes are assessed by states in place of or in addition to state and federal estate taxes. The tax is calculated separately for each beneficiary, and each beneficiary is responsible for paying his or her own inheritance taxes.

I did not work at all last year, and I lived entirely off my savings. Do I need to file a tax return?

Not necessarily. If you earned interest from bank accounts, or interest and/or dividends from investments, you may have to file a return.

Do I have to report the alimony from my ex-husband on my tax return?

Yes. Unless the payments are specifically identified as child support, they are taxable and must be declared as you would any other form of taxable income.

I worked during the Christmas season helping out in a warehouse. My friend worked there as well, and she got a 1099-MISC with the money she was paid in the “Non-Employee Compensation” box. I didn’t get a form like that. Do I need to report the income?

Yes. Employers are not obligated to send you a 1099-MISC unless they paid you more than $600 in a calendar year. You still have to declare the income on your tax return.

My bank didn’t send me a 1099-INT for the interest earned on my account. Do I still need to report it?

Yes. Banks and other financial institutions aren’t required to send you a 1099-INT unless you earned more than $10 in interest. You still need to report the income, however.

Is rental income taxable?

Yes. In the U.S., you pay taxes on the amount left after you deduct all allowable and documented expenses from the rents paid.

How do I report rental income?

You use Schedule E, Page 1, on the Form 1040.

Do I have to pay taxes on security deposits from my renters?

Actual security deposits are not taxable, as they are being held with the expectation that they will be returned to the renter when they leave. If the deposit is “first and last month’s rent,” it is considered rents paid in advance and is taxable.

What if I keep part or all of a security deposit?

You include it in your rental income for the year you don’t return it to a vacating tenant.

My tenant takes care of the property’s landscaping in exchange for rent. Is that considered income?

Yes. You must report the value of the work provided as rental income.

My tenant gives me free goods from his store. Is that considered rent?

Yes. You must report the value of the goods received as rental income.

If I rent out my vacation home, can I still use it myself sometimes?

Only for a very limited amount of time each year, if you want the chance to deduct losses on your rental property. To be treated as a business for tax-loss purposes, your use of the property can’t exceed 14 days or 10% of the days the unit is rented during the year, whichever is greater. The property can’t produce a loss that will reduce your tax bill on other income.

How do I depreciate the land of my rental house?

You don’t. Land is not depreciated.

How do I depreciate the empty lot I purchased build a mixed-use building on?

You don’t. Land is not depreciated.

What method do I use to depreciate my rental house?

You use the Straight Line method. The useful life is 27.5 years.

What method to I used to depreciate my commercial property that houses a music store?

You use the Straight Line method. The useful life is 39.5 years.

What method do I used to depreciate my building that has a store on ground level and apartments on the first floor?

You use Straight Line method. The useful life is 39.5 years.

I recently got my green card. Do I need to declare the income from my foreign rental to the IRS?

Yes. U.S. citizens and residents are taxed on all income, worldwide. You declare your rental income on Schedule E. However, you can write off the expenses you incurred in the normal operation of the rental, as well as the mortgage interest and property taxes you paid.

What method do I use to depreciate my rental house in Tel Aviv?

You use the Straight Line method. The useful life is 40 years.

What is a REIT?

REIT stands for “real estate investment trust.” It is a pass-through entity used for real estate investing in which shareholders are taxed on dividends received.

Are there different kinds of REITS?

Broadly, there are mortgage REITS that own loans secured by real property (typically apartment buildings or shopping malls or hotels); and equity REITS that own interests in real property. Hybrid REITS, which own a mix of equity in property and interest in mortgages, also exist. They are relatively rare.

I heard that REITS can invest in cellphone towers and prisons. Is this true?

Yes. The IRS has in recent years allowed for “non-traditional REITs.” The underlying principles remain the same: REITS are tied to real estate or in loans secured by real estate.

How do I fill out page one of Schedule E if I have royalty income but no rental property income?

You don’t. It’s okay to just fill out and file page two of Schedule E.

I started renting out my house last year. Where do I report the income? How do I deduct expenses?

You use Schedule E. an attachment to Form 1040.

I have been taking care of my neighbor's kids since he went to jail two years ago. Can I claim them as dependents for the Earned Income Credit?

Only if they were placed in your care as foster children by the state, or if you adopted them.

If I claim my daughter as a dependent because she is a full-time college student, can she claim her own personal exemption when she files her return?

No. Your daughter cannot claim her personal exemption if she is claimed as a dependent by another taxpayer. She should check the box on her Form 1040 (or 1040-EZ) indicating that someone else can claim her as a dependent.

Is there an age limit on claiming my child as a dependent?

To be claimed as your dependent, your child must either meet the qualifying child test or the qualifying relative test. To meet the qualifying child test, your child must be younger than you, and, as of the end of the calendar year, either be younger than 19 years old or be a student and younger than 24 years old. There is no age limit on claiming your child as a dependent if the child meets the qualifying relative test.

So long as all of the following tests are met, you may claim a dependency exemption for your child:

  • Qualifying child or qualifying relative test,
  • Dependent taxpayer test,
  • Citizen or resident test, and
  • Joint return test.
Does the Personal Exemption Phase Out?

Yes. Starting with the Tax Year 2013, at an adjusted gross incomes of $250,000 ($300,000 for married couples filing jointly) and higher begins to phase out. For single taxpayers, the personal exception is gradually reduced to $0 at $372,500, and it is completely phased out for married taxpayers at $422,500.

For those filing as Head of Household, the phase-out range is between $275,000 and $397,500, while the phase-out for Married Filing Separate taxpayers is between $150,000 and $211,250.

These ranges will be adjusted for inflation going forward.

What is the “Standard Deduction”?

The standard deduction is an amount that taxpayers may exclude from taxable income. The amount depends on the filing status used. It is adjusted for inflation on an annual basis.

How do I itemize deductions?

On Schedule A, an attachment to Form 1040.

I want to file online using Form 1040-EZ. How do I itemize my deductions?

You don’t. You must use Form 1040 when itemizing. Schedule A cannot be attached to a 1040-EZ.

Can I deduct my medical expenses?

For most taxpayers who itemize their deductions, only medical costs in excess of 10% of their adjusted gross income are deductible. This increased from 7.5% as of tax year 2013.

There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016 for individuals age 65 and older and their spouses. If you or your spouse are 65 years or older or turned 65 during the tax year you are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016.

What medical expenses will the IRS let me deduct?

You may deduct preventative care, treatment, surgeries, and dental and vision care. You can also deduct visits to psychologists and psychiatrists. Prescription medications and appliances such as glasses, contacts, false teeth and hearing aids are also deductible.

You can also deduct the expenses that you pay to travel for medical care such as mileage on your car, bus fare and parking fees.

Do itemized deductions phase out?

Yes. Starting with the Tax Year 2013, the total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The phase-out begins at $250,000 for single filers, $300,000 for married couples filing jointly, $150,000 for those filing separately, and $275,000 for those filing as Head of Household. Some categories of itemized deductions are not subject to the phase-out.

What itemized deduction categories are not phased out at high income levels?

The following deductions are not subject to the phase-out:

  • Medical and dental expenses
  • Investment interest expenses
  • Casualty and theft losses from personal-use property
  • Casualty and theft losses from income-producing property
  • Gambling losses (only to the level of gambling winnings)
How do I write of gambling losses on my taxes?

First, you must declare gambling winnings. You enter these on Line 21 on your Form 1040. Second, you must itemize you deductions and file Schedule A. You may deduct losses up to the level of your winnings.

Can I write off the interest I paid the IRS when I paid my taxes late?

No. Interest and penalties paid to the IRS is never deductible.

I’m a professional delivery driver, and I got a speeding ticket while driving for work. Can I write that off as a business expense?

No. Speeding tickets, parking tickets, and other fines are not tax deductible, whether they are levied against you while at work or on your personal time.

My mother is in a nursing home, and I pay for the entire cost. Can I deduct the expenses?

Nursing home expenses are allowable as medical expenses in certain instances. They are treated as medical expenses, and they are deducted as such on Schedule A.

If you, your spouse, or your dependent is in a nursing home, and the primary reason for being there is for medical care, the entire cost, including meals and lodging, is a deductible medical expense.

If the individual is in the home mainly for personal reasons, then only the cost of the actual medical care is a deductible medical expense, and the cost of the meals and lodging is not deductible.

Is the mortgage interest and property tax on my second home deductible on Schedule A?

Yes, generally speaking. Deductible real estate taxes include any state, local, or foreign taxes based on the value of the real property that is levied for the general good of the public. Taxes charged for local benefits and improvements that increase the value of the property, such as assessments for sidewalks, water mains, sewer lines, parking lots, and similar improvements, are not deductible.

The mortgage interest must meet the same the same requirements for deductibility as interest on a primary residence. Further, if you have rented it out during the year, you must have used it personally for at least 14 days. Otherwise, you must treat the interest as a rental expense on Schedule E.

Where do I deduct my child support payments?

Nowhere. Child support payments are never deductible. If a divorce decree or other court order says that you must be child support and spousal support (alimony), the alimony portion can be written off, but not the child support portion.

I’m a full-time college student. Can I deduct the cost of a computer as an educational expense?

Normally no, equipment, such as a computer or educational supplies that are not required course items, is not deductible expenses. Only if it were required for everyone in a particular class or major, then the expense would be deductible.

Can I make a donation to the U.S. government to help pay off the national debt?

Yes. You can contribute online with a credit or debit card through a Department of the Treasury website (www.pay.gov) by filling out a short form, or you can send a check payable to the U.S. Treasury’s “Bureau of the Public Debt.” In the memo section of the check, you should not that your donation represents a “gift to reduce the debt held by the public.”

Send your check to:

Bureau of the Public Debt
ATTN: Department G
P.O. Box 2188
Parkersburg, WV 26106-2188

Are gifts to the U.S. government tax deductible?

Yes. They are treated like any other qualified charitable donations and may be claimed on Schedule A when deductions are itemized.

Capital Gains and Losses

I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares?

You own shares in the mutual fund, but you do not own the underlying capital assets, such as stocks and bonds. One of the ways the fund makes money for you is to sell these assets at a gain. If the capital asset was held by the mutual fund for more than one year, the nature of the income is capital gain, which gets passed on to you. These are called capital gain distributions, which are distinguished on Form 1099-DIV (PDF) from other types of income such as ordinary dividends. Capital gains dividends are taxed as long-term capital gains regardless of how long you have owned the shares in the mutual fund.

What are Capital Gains Dividends?

When a mutual fund you have invested in sells securities at a profit, your share of the gain is passed onto you in the form of capital gains dividends. Capital gains dividends are taxed as long-term capital gains regardless of how long you have owned the shares in the mutual fund.

What is a mutual fund?

A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management. The investors own shares in the mutual fund, while the fund owns the capital assets in which it has invested, such as shares of stock, corporate bonds, government obligations, and so.

I sold my home at a loss. How do I write that off on my taxes?

You can’t. The loss on the sale of a home used by you as your personal residence at the time of sale, is not deductible. Only losses associated with property used in a trade or business and investment property (stocks) are deductible.

The IRS defines fair market values the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

NIIT

What is the Net Investment Income Tax (NIIT)?

The Net Investment Income Tax is imposed at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above threshold amounts determined by filing status. The tax went into effect on Jan 1, 2013.

Who has to pay Net Investment Income Tax (NIIT)?

Generally speaking, individuals with investment income and modified adjusted gross income above $200,000 (single and head of household filers), $250,000 (married/joint and qualifying widower filers), and $125,000 (married/separate filers).  Even those who are   exempt from Medicare taxes may be subject to the Net Investment Income Tax if they have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.

The threshold amounts are not adjusted for inflation.

Do non-resident aliens have to pay the Net Investment Income Tax?

No. However, there are special rules for an NRA  who is married to a U.S. citizen or resident and has made, or is planning to make, an election to be treated as a resident alien for purposes of filing as Married Filing Jointly. You should contact GPL for more information.

Do dual status aliens have to pay the Net Investment Income Tax?

A dual-status individual, who is a resident of the United States for part of the year and a non-resident alien for the other part of the year, is subject to the NIIT only with respect to the portion of the year during which the individual is a United States resident. The threshold amount is not reduced or prorated for a dual-status resident.

I am a dual-status alien, but I am claiming tax treaty benefits to be treated as a resident of a foreign country for tax purposes. Do I need to pay the Net Investment Income Tax?

No, but be sure to identify the treaty section you are using to make the claim when filing your return.

What estates and trusts are subject to the Net Investment Income Tax?

Estates and trusts are subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year. Generally, the threshold amount for the upcoming year is updated by IRS each fall in a revenue procedure. For 2014, the threshold amount is $12,150.

There are special computational rules for certain unique types of trusts, such as Qualified Funeral Trusts, Charitable Remainder Trusts and Electing Small Business Trusts, which can be found in the final IRS regulations.

What estates and trusts are not subject to the Net Investment Income Tax?

The following trusts are not subject to the Net Investment Income Tax:

  • Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code (e.g., charitable trusts and qualified retirement plan trusts exempt from tax under section 501, and Charitable Remainder Trusts exempt from tax under section 664).
  • A trust or decedent’s estate in which all of the unexpired interests are devoted to charitable contributions allowed under the tax code.
  • Trusts that are classified as “grantor trusts” under the tax code.
  • Trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).
  • Perpetual Care (Cemetery) Trusts.
  • Electing Alaska Native Settlement Trusts.
What is included in Net Investment Income?

In general, anything the IRS defines as passive income. This includes (but is not limited to) interest, 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.

What kinds of capital gains are included in Net Investment Income?

If not offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income:

  • Gains from the sale of stocks, bonds, and mutual funds.
  • Capital gain distributions from mutual funds.
  • Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
  • Gains from the sale of interests in partnerships and S corporations.
Can the Net Investment Income Tax apply to gain on the sale of a personal residence?

Yes, but only on gain above the gross income exclusion amount of $500,000 for married filing joint and $250,000 for  single filers.

Will I have to pay both the 3.8% Net Investment Income Tax and the additional .9% Medicare tax?

Maybe. You can be subject to both taxes, but not on the same type of income.

The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income.

How do I calculate my Net Investment Income?

You subtract certain expenses properly allocatable to the investment income. Examples of deductions, a portion of which may be properly allocable to Gross Investment Income, include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust) and state and local income taxes.

How do I report and pay my Net Investment Income Tax?

Individuals, estates, and trusts use Form 8960 to compute their Net Investment Income Tax. For individuals, the tax will be reported on, and paid with, the Form 1040. For estates and trusts, the tax will be reported on, and paid with, the Form 1041.

Payments

When are the quarterly estimated tax payments due?

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your income tax return at the end of the year.

If you mail your estimated tax payment and the date of the U.S. postmark is on or before the due date, the payment generally will be considered to be on time. The payment periods and due dates for estimated tax payments are:

Jan 1 – Mar 31: Due date April 15
Apr 1 – May 31: Due date June 15
Jun 1 – Aug 31: Due date September 15
Sep 1 – Dec 31: Due date January 15 of the following year

If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday.

How do I know if I have to file quarterly individual estimated tax payments?

You must make estimated tax payments for the current tax year if you expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and refundable credits; and you expect your withholding and refundable credits to be less than the smaller of 90% of the tax to be shown on your current year’s tax return, or 100% of the tax shown on your prior year’s tax return.

Should self-employment taxes be paid quarterly or yearly?

If you are required to make estimated tax payments, the self-employment tax is paid on a quarterly basis with payments that include both income tax and social security tax.

What is meant by 'no tax liability' in the exceptions to the estimated tax penalty?

You do not have to pay estimated tax if you meet all three of the following conditions:

  • You had no tax liability for the prior year.
  • You were a U.S. citizen or resident for the whole year.
  • Your prior tax year covered a 12-month period.

You had no tax liability if your total tax was zero or you did not have to file an income tax return.

Corporate and Partnership Tax Returns

What is Schedule M-1?

The purpose of Schedule M-1 is to reconcile income on the company books versus the income netted for tax purposes. The reason for this is that these numbers can appear very different as the books are kept in a manner that documents maximum profits (within the standards of generally accepted accounting principles) while the goal with tax documents is to minimize the level of profit and tax liabilities (within the standard practices and legal framework established by federal and state taxing authorities).

At its most basic, Schedule M-1 simply presents the reconciling of a corporation’s accounting income to tis taxable income. It is used for companies with assets of $10 million or less.

What is Schedule M-2?

Schedule M-2 is prepared for companies with assets in excess of $25,000. It ties to Schedule L, and its purpose is to provide an analysis of a company’s equity balance, based on book records.

Is an S-corporation required to pay quarterly estimated tax?

An S-corporation must make installment payments of estimated tax if the total of the following taxes is $500 or more:

  • The tax on built-in gains,
  • The excess net passive-income tax, and
  • The investment credit recapture tax.
What is Form 990?

This is the basic tax form that non-profit organizations and charities use to report to the IRS. The exact form used depends on the nature of the organization. The series includes 990-EZ, 990-N, 990-PF, or 990-T.

My organization is a charity, and I’ve been told I’m too small to need to register with the IRS. Do I need to file tax returns?

Almost all charities and nonprofits have an obligation to file an annual return with the IRS and most states—even “public welfare organizations,” such as those registered under Code Section 501(c), and charities those that are so small that they are not required to apply to the IRS for recognition as tax-exempt (such as those that normally do not have more than $5,000 in annual gross receipts), as well as organizations exempt under other Code Sections, such as 501(c).

When do I have to apply to the IRS for recognition of my charity as a tax-exempt organization?

When you have regular annual gross receipts in excess of $5,000. targeted at someone who is new to this problem or service. Just got an IRS notice. Just starting their business and knows they need some kind of accounting, etc.

What is the deadline to file my nonprofit’s annual tax return?

The deadline for filing the Form 990 with the IRS depends on the fiscal year of the nonprofit. The forms are due no later than 5 ½ months after the end of the nonprofit’s fiscal year.

I missed the deadline to file my annual return for my tax-exempt organization. What happens now?

There are penalties for failure to file a timely and/or inaccurate return that range from monetary penalties, to automatic loss of tax-exempt status if an organization fails to file annual returns for three consecutive years. You should seek assistance from a tax preparer who specializes in nonprofits immediately.

Estate

Will my same-sex spouse be considered a surviving spouse for purposes of the marital deduction for estate tax purposes?

Yes. For federal tax purposes, the terms “spouse,” “husband,” and “wife” includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married.  It doesn’t matter if the couple resides in a state that does not recognize the validity of same-sex marriages, so long as the same-sex marriage was created under the laws of a state that recognizes such unions.

The IRS also considers same-sex individuals to be lawfully married if their union was created under the law of foreign nations that recognize same-sex marriages.

However, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.

All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction.  The property must pass “outright.”  In some cases, certain life estates also qualify for the marital deduction.

What is included in the Estate for tax purposes if my spouse dies?

The Gross Estate of the decedent consists of an accounting of everything owned jointly or certain interests in at the date of death. The fair market value of these items is used, not necessarily what was paid for them or what their values were when acquired. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Keep in mind that the Gross Estate will likely include non-probate as well as probate property.

What is excluded from the Estate?

Generally, the Gross Estate does not include property owned solely by the decedent’s spouse or other individuals. Lifetime gifts that are complete (no powers or other control over the gifts are retained) are not included in the Gross Estate (but taxable gifts are used in the computation of the estate tax). Life estates given to the decedent by others in which the decedent has no further control or power at the date of death are not included.

What deductions are available to reduce the Estate Tax?

Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass “outright.” In some cases, certain life estates also qualify for the marital deduction.

Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
Mortgages and Debt.
Administration expenses of the estate.
Losses during estate administration.

What is 'Fair Market Value' in regards to an estate?

The IRS defines fair market value s the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.

What about the value of my family business/farm?

Generally, the fair market value of such interests owned by the decedent are includible in the gross estate at date of death. However, for certain farms operated as a family farm, reductions to these amounts may be available.

In the case of a qualifying family farm, the tax code allows an inflation-adjusted reduction from value of up to $1,090,000 for 2014. A similar deduction for a family owned business was repealed beginning in 2004. There is presently no inflation-adjusted reduction for a family owned businesses.

What if I don’t have everything ready for filing the estate return by the due date?

The estate’s representative may request an extension of time to file for up to six months from the due date of the return. However, the correct amount of tax is still due by the due date and interest is accrued on any amounts still owed by the due date that are not paid at that time.

Should I hire someone to represent me and prepare and file the estate return? How do I pick the right person?

There are several factors to consider:

  • How complex is the estate? By the time most estates reach $1,000,000, there is usually some complexity involved.
  • How large is the estate?
  • In what condition are the decedent’s records?
  • How many beneficiaries are there and are they cooperative?
  • Do I need an estate tax professional?

With these questions in mind, it is a good idea to discuss the matter with several estate tax professionals. Ask about how much experience they have had and ask for referrals. This process should be similar to locating a good physician. Locate other individuals that have had similar experiences and ask for recommendations. Finally, after the individual(s) are employed and begin to work on estate matters, make sure the lines of communication remain open so that there are no surprises during administration or if the estate tax return is examined.

Finally, most estates engage the services of both attorneys and CPAs or Enrolled Agents (EA). The attorney usually handles probate matters and reviews the impact of documents on the estate tax return. The CPA or EA often handles the actual return preparation and some representation of the estate in matters with the IRS. However, some attorneys handle all of the work. CPAs and EAs may also handle most of the work, but cannot take care of probate matters and other situations where a law license is required. In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time.

What happens if I sell property that I have inherited?

Such property is often considered a capital asset and may be subject to capital gains (or loss) treatment. However, the tax code provides that the basis of property acquired from a decedent is its fair market value at the date of death, so there is usually little or no gain to account for if the sale occurs soon after the date of death.

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