| I hoped someone else would take a swing at this. But no one has so
I'll start it. All disclaimers apply (it's been four years and my
memory...)
> The holder of a 401K and IRA account dies before they receive any funds
> from the account. Upon the death of the taxpayer the proceeds of the
> funds gets added to the deceased persons estate.
> The deceased person has to have an income tax filed for the period
> of the tax year they where alive. Since the 401K and IRA distributions
> were not made while the taxpayer was alive they do not have to be
> included on the tax form being prepared for the deceased person.
> Does a federal tax form have to be filed for the estate? This tax form
> would cover the period of time from the dispursement to the end of the
> tax year. Since the dispursement is substantial the funds will remain
> in the estate account collecting interest until the estate is settled.
A short answer is yes, and then some.
The fiduciary (called Executor, Executrix, Personal Representative, or
whatever according to the state law) appointed by the Probate Court is
responsible for filing the deceased person's final tax return, which
covers all income up to the Date of Death. A separate Federal return
is filed each year by the fiduciary for the Estate of {deceased's name}
for the period beginning with the date of death and continuing until
the assets are distributed from the Estate--which is often years.
Taxes are paid out of the Estate funds/income.
Once the Estate has filed its final return, subsequent income is
reportable by the heirs, whether or not they have actually received the
assets (a Trust company will protect itself by holding back a 'small'
portion of an Estate after the legal closing for maybe another year
until all audits are done and the dust firmly settled).
> Does the estate have to file a federal and state (Ma.) income tax for
> any monies that collect interest while in the estate, or does the
> estate tax take care of that.
Don't know details of Mass. but generally for income tax purposes,
states seem to follow the feds, if a state income tax is required of
the living person, assume it's required of the Estate.
The theory is that 'trusts' and 'estates' are persons to the law, you
and I are called 'natural' persons (I think) when the distinction is
important. When you die, your remaining stuff belongs to your Estate,
which more or less is created automatically and exists as long as
needed. You keep stuff out of your Estate by assigning ownership to
another person (natural, or Trust) while you are living, subject to the
Gift tax.
Don't confuse Estate tax and Income Tax. The feds don't tax your
wealth, only the income you derive from it or the gain realized when
you exchange it. States are a different matter, real estate value is
routinely taxed, and some states have taxes on other tangible property
(Mass has one on cars, in most towns).
The Federal Estate tax is on wealth itself, not just dividend and
interest income. On the other hand, any Estate of net worth less than
$600,000 is not subject to Federal Estate tax. But everything above
that is clipped for around 33%. This is why estate planners make
money (helping smart money avoid this tax).
States differ on their approach to estates. Smart ones like Florida
encourage people to move there for retirement with their $$s by not
having a 'death tax'. Massachusetts offers its citizens an incentive
to move away.
People get pretty indignant about the Estate tax. I think that a
little self-serving for the following reason. The biggest loophole in
the federal tax code is one that leaves completely untaxed all capital
gains unrealized by the decedent. More simply, when you die, all of
your stuff will be taxed based on its value on the day you died.
Period. Stocks, bonds, not to mention the house you owned and lived in
for 40 years (with its cost basis adjusted for additions and earlier
deferred capital gains) if sold would show capital gains/losses that,
in theory should be taxable income to the Estate or heirs. Nope,
vanishes--never to be taxed. The house passes with a new cost basis of
it's market value on the date of death, same for all assets.
This isn't generosity on the part of our gummint. They'd have a
hell-of-a time calculating/arguing cost basis based on the chaos of
records and lifetime of accumulated stuff. So think of the Estate tax
as the gummint's way of simply and economically capturing it's (our)
share of that capital gain income. As a taxpayer, I approve. Of
course, if you're not really comfortable with accounting, this argument
may not make you feel any better.
> I did read that when a heir receives IRA/401k distributions they have
> to pay tax that that the owner of the fund had deferred.
Interesting. Seems inconsistent with the above. It could be true,
given that such IRAs are rather recent and someone probably has the
records. The IRS in it's files of your tax returns, for one.
The only thing I'm really sure of is that this whole business is
outrageously complex. The best advice is--if your stuff looks like its
going to be worth much more than $600,000 (and I think you should count
half of jointly held assets), hire professional help. Otherwise,
concentrate on earning and saving that first mil (the hardest one, they
tell me).
gordie
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