This year, the estate tax and generation-skipping transfer tax have, temporarily, disappeared.  If you (or your tax preparer) put together and send in a Form 706, the IRS will promptly send it right back to you.  They simply have no place to put it.

Congress is still doing battle over issues like the Bush-era tax cuts and has yet to pass an estate tax fix.  And with disagreement over the various tax extenders, it’s unlikely that any resolution will happen this year.  Many of the tax cuts were launched back in 2001 with the Economic Growth and Tax Relief Reconciliation Act.  Because they were passed under budget reconciliation rules, and therefore will only apply for ten years, they are set to expire in 2011.  At that time get ready for estate taxes to jump, as mush as 55%

In the meantime, there are still some carryover basis rules that are applicable to property acquired either by gift or inheritance.  For gifted property, it’s the lesser of the donor’s adjusted basis, or the fair market value of the property when it was given.  For property received through inheritance, it’s the lesser of the deceased adjusted basis or the fair market value of the property at the time of death.

A new, more streamlined type of return that addresses the new modified carry-basis rules will have to be filed if a person who dies owns in excess of $1.3 million in property (or if they received property as a gift, within three years of their death, that should have been reported on a federal gift tax return).  The new return is due at the same time as the decedent’s final income tax return.  Anyone identified in the return as receiving a share of the inheritance must also receive all the information listed on the return, within 30 days of the due date.

Along with the new return will be some new penalties as well. For those who fail to file, $10,000, for failing to report gifts received with 3 years of death, $500.  Be sure to have a qualified tax relief professional go over your returns to be sure everything is straight.

Disclaimer:  The information contained in this article is in no way intended for use as legal tax advice.  No assumption should be made that a tax attorney, enrolled agent or former IRS employee was involved in the creation of any content herein.  Advice on personal or business tax matters can be obtained by contacting Advanced Tax Help at (800) 970-8704, or by logging on to www.advancedtaxhelp.com