The IRS has just published a new form designed to complicate life for executors. It requires that the executor report the tax basis for inherited assets to the inheritors … and to the IRS. For example, suppose John bought his house for $40,000 thirty years ago. He just died when his house was worth $300,000. The good news is that is children owe no capital gains tax if they turn around and sell it for the $300,000. But that value is now reported to the children and the IRS on the new Form 8971. If the house is later sold for more than the $300,000 then capital gains tax will be owed by the children on the addition profit above the $300,000.
Congress has now passed new estate tax legislation, and the President has signed it. In 2011 and 2012, each citizen will have a $5 million Federal estate tax exemption, and the tax rate on assets beyond that will be 35%. This is a larger exemption and lower rate than was in effect before 2010. Maryland residents should remember, though, that Maryland only has a $1 million exemption, so many Marylanders will owe a state estate tax, but not a Federal estate tax. Though the Maryland calculation is complex, the tax is usually in the area of 10% or so.