More On Tax Planningfrom The Advisor's Professional Library
- Precious Metal Taxation Precious metals can be used to better diversify a portfolio but can be volatile. The tax implications of investing in these types of assets vary depending upon the situation.
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
The IRS on March 25 announced problem areas and changes with Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return.
Form 706 must be filed for the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $5 million.
The IRS noted that for estate tax returns after Dec. 31, 1976, Line 4 of Form 706 lists the cumulative amount of adjusted taxable gifts within the meaning of IRC section 2503. The computation of gift tax payable (Line 7 of Form 706) uses the IRC section 2001(c) rate schedule in effect as of the date of the decedent's death, rather than the actual amount of gift taxes paid with respect to the gifts.
With the top bracket tax rates decreasing from 55% (in 2001) down to 35% (in 2010) and a periodic drop in rates in between, the IRS said, it has encountered situations where gift taxes paid were greater than the tax calculated using the rate in effect at the date of death.
The alert noted that some Form 706 software used by practitioners require a manual input of the gift tax payable line. It said that a number of preparers were reporting gift taxes actually paid rather than calculating the gift tax payable under date-of-death rates. These errors result in underpayment of estate tax due. Cases with this issue will involve estates where large gifts were made during life and at a time when tax rates were higher than at date of death.
The alert also noted these exclusions:
- The annual exclusion for gifts is $11,000 (2004−2005), $12,000 (2006−2008 and $13,000 (2009−present).
- The applicable exclusion amount is increased to $5 million for estates of decedents dying on or after Dec. 31, 2009
- The applicable exclusion amount for gifts made after Dec. 31, 2009, is $1 million. For gifts made after Dec. 31, 2010, the applicable exclusion amount is increased to $5,000,000.
706 Filing Instructions
The IRS said that, although few significant changes have occurred on Form 706, one change will affect all filers: the elimination of the allowable State Death Tax Credit. For decedents dying in 2005 and later years, it is a deduction.
The IRS pointed out that the due date for filing a Form 706 for estates of decedents dying in 2010 is Sep. 19, 2011. As well, a request for an extension of time to file an estate or gift tax return must go to the Cincinnati Service Center, even if income or other tax returns are filed elsewhere.