The American Institute of CPAs has written a letter to the Internal Revenue Service asking for guidance on applying the carryover basis rules to estates of taxpayers who died this year.
In 2010, the estate tax was effectively zero. Under a tentative deal worked out this week between President Obama and congressional Republican leaders, the estate tax rate would rise to 35 percent for estates of over $5 million for individuals or $10 million for couples. If the deal fails to pass in Congress, the estate tax would go back to pre-Bush tax rates of 55 percent for estates over $1 million.
The AICPA letter to the IRS pertains to those who died in 2010 to help their accountants and executors apply the carryover basis rules in settling their estates. Basis is generally the original purchase price of an asset, such as stocks or property.
“The carryover basis regime is new and unfamiliar, and the April 18, 2011, due date for filing the information returns allocating the basis adjustments to particular assets is rapidly approaching,” AICPA Tax Executive Committee chair Patricia A. Thompson wrote in the letter.
The traditional “step-up basis” method, under which heirs were permitted to use the fair market value of the assets at the time of the decedent’s death, was repealed for 2010 by the Economic Growth and Tax Relief Reconciliation Act of 2001 and replaced with carryover basis. Under carryover basis, heirs use the decedent’s original cost of the assets as their basis when calculating taxes due, but the executor is allowed to increase the basis of the assets up to $1.3 million. An additional $3 million increase is permitted if the assets are passed to the surviving spouse.
Among the specific questions for which the AICPA requested guidance are: who will make the basis allocation if the estate does not have an executor, what happens to the decedent’s suspended passive losses, will the basis allocation form be a stand-alone form or a form attached to the decedent’s final Form 1040, how do the rules apply to community property, and how are net operating loss carryovers and capital loss carryovers measured?
The letter was sent to the IRS last week before the framework of the White House deal on the Bush tax cuts was announced, and before the Senate failed to pass a bill introduced by Senate Finance Committee Chairman Max Baucus, D-Mont., which included provisions related to the return of the estate tax. However, the questions will still be pertinent, even if Congress approves the deal.
“They are not likely to repeal retroactively to Jan. 1, 2010 the carryover basis rules for 2010 deaths so IRS will need to provide guidance and soon,” said AICPA senior technical tax manager Eileen Sherr. “The Baucus-proposed legislation from last week had an optional election to apply 2009 estate tax rules for 2010 deaths instead of carryover basis, but did not repeal it for 2010. Carryover basis IRS guidance is still needed for those that would not want to elect that option under the Baucus proposal.”
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