Dear Tax Man: I'm 60-years-old and have about $1.6 million in a Section 401(k) plan and an IRA. Are there any actions I could undertake to reduce potential estate taxes on the 401(k)/IRA? - G.J.B. Massachusetts
CBS.MW: This may sound like a facetious answer, but the surest way you can minimize estate taxes is to minimize your taxable estate. This can be done in several ways. You can take distributions from those retirement plans and pay the appropriate income taxes on the distributions. Of course, that's only swapping estate tax for income tax and, more than likely, not exactly what you had in mind. But, on the positive side, once you've taken the distribution, you can then make tax-free gifts of up to $10,000 per person per annum to your friends and relatives. In addition to making those friends and relatives happy, the gifts will reduce the gross amount of assets includable in your estate.
You also could minimize your estate by spending the money on things that have no inherent lasting value such as riotous living. If you've already spent it, it won't still be around for inclusion in your estate! By designating your spouse as your heir, if you have one, the unlimited marital deduction would eliminate any estate taxes on your estate and defer them until your spouse passes on.
You could give up your U. S. citizenship and emigrate to a country that doesn't have estate taxes but the downside there is you'd have to live in that country and it probably wouldn't be anywhere near as pleasant as living in the good ole U.S.A.
Since you're only 60 years old, the odds are you will live past the year 2006. Barring any changes in the law between now and then, the estate and gift tax exemption is scheduled to go up to $1 million by then.
If I had that large of an estate, I would consult with competent tax professionals to set up my estate in such a way as to minimize negative tax consequences. I'm sure they could come up with even more ideas that space doesn't permit discussing here.
Basis in property at date of death
Dear Tax Man: My wife's father put his house and an adjoining lot in her name several years ago. How do we determine the tax basis when we sell the property after his death? He's still living in the house and pays all upkeep, including property taxes. - C.D. Thousand Oaks, Calif.
CBS.MW: The answer to your question depends on your father-in-law's intent in transferring the property to your wife. If he intended to make a gift at the time he transferred title to the property, a gift tax return should probably have been filed. In that scenario, if the property were sold at a gain, your wife's basis would be the same as her father's (the donor) basis.
If the transfer of title was made merely for convenience's sake, then your father-in-law is deemed to still be the owner of the asset. The basis of the property would be its fair market value at the date of his death or six months from the date of death if the executor of the estate so chooses. The value of the property would then, of course, be included in his estate.
It would be advisable for your wife to seek competent legal counsel to study all aspects of this situation and provide her with an opinion.
Transaction expenses incurred in IRAs
Dear Tax Man: I rolled over my Section 401(k) plan into a self-directed IRA. I buy and sell stock. I doubled the assets in a year and a half. I'm 55 and I don't plan on taking any money out until after I'm 60. Should I not have any tax paid until that time? Also, do I claim the transaction fees at that time? What are the rules? - T.E.W. Pleasant Prairie, Wisc.
CBS.MW: As long as the rollover of the Section 401(k) assets was made in a timely fashion to a qualified trustee, any tax due is deferred until you actually take a distribution. The transaction fees incurred in conducting the trades within the IRA are not deductible
on your return as they are expenses incurred within the context of the retirement plan.
Still making Roth IRA contributions after all these years
Dear Tax Man: I'm 72 and taking withdrawals from my regular IRA. I also still work part time. Do the laws permit me to make a non-deductible contribution to my Roth IRA? If the answer is tied to income, must this total include IRA withdrawals and Roth conversion income as reported for AGI line on 1040? - A.M.P. San Rafael, Calif.
CBS.MW: There are no age limits that restrict contributions to Roth IRAs as there are with traditional IRAs. You can contribute to a Roth as long as you have compensation income and your modified adjusted gross income does not exceed $160, 000 for those married persons filing jointly, $10,000 for married persons living together but filing separately or $110,000 for singles or married persons living separately and filing separately. The modified adjusted gross income includes traditional IRA distribution income, but not the Roth conversion income.
Basis of inherited rental property
Dear Tax Man: My mother had a trust. Upon her death, her property was divided between my brother and I. In 1994, as executor of his portion, I purchased a house for rental purposes for income for him while in a nursing home. In April 1997, he passed away. His portion of the trust transferred to me. I've continued to rent the house and now plan on selling. Am I responsible for the capital gains from 1994? - H.M. Nevada
CBS.MW: Without knowing the full particulars of your trust situation, it appears that you acquired the property through inheritance in 1997. Your basis would most likely stem from that time and would be the property's fair market value at that time. I suggest that you check with competent tax counsel to properly establish your basis and any gain on loss realized.
Excluding sale of residence
Dear Tax Man: A friend of mine just sold his house for $600,000. He paid $100,000 for it. For the past eight years he lived there with his girlfriend, whom he married this year. Will he get the $500,000 or the $ 250,000 tax exemption? She can prove that she lived there and paid part of the bills. - L.B.A. San Francisco
CBS.MW: The exclusion amount depends on your friend's marital status and whether he and his girl friend/spouse meet the various tests found in the tax law. Since at least one of them, your friend, owned the home for eight years prior to the sale, they meet the ownership test. If your friend and his girlfriend/spouse both lived in the home as their principal residence for two out of the five years prior to the sale, they would meet the use test. If neither has claimed another personal residence exclusion within the past two years and they file a joint tax return for the year sale, they may exclude the entire $500,000 gain. If any of the above tests were not met, your friend's exclusion would be limited to $250,000.
Filing a deceased spouse's final return
Dear Tax Man: My wife died in June. Please tell me what specific federal tax forms I must obtain to show that she died and how exactly does one show that she will never file another federal tax return? -- A.H. @mindspring.com
CBS.MW: If you file a joint return for the year, you would write in the word "Deceased" and her full name on the top margin of your joint Form 1040. You would then fill in the name portion of the return with your name and her name or, better yet, use the peel off label that comes with your tax package.
In signing the joint return, sign your name on Page Two of Form 1040 where the form calls for your signature. In the area calling for the spouse's signature, write in "Filing as Surviving Spouse." More complete information can be found in Chapter 4 of IRS Publication 17, Your Federal Income Tax. This publication, along with IRS Publication 559, Survivors, Executors and Administrators, can be obtained after the first of the year at IRS Walk-in offices or by calling the IRS Forms-Only Line, 800-424-3676.