How do I deduct the administration expenses of my father's estate?
Expenses of administering an estate can be deducted either from the gross estate in figuring the federal estate tax on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, or from the estate's gross income in figuring the estate's income tax on Form 1041, U.S. Income Tax Return for Estates and Trusts. However, these expenses cannot be claimed for both estate tax and income tax purposes. In most cases, this rule also applies to expenses incurred in the sale of property by an estate (not as a dealer).
For more information, refer to Publication 559, Survivors, Executors, and Administrators, designed to help those in charge of the property (estate) of an individual who has died. Also, refer to Publication 950, Introduction to Estate and Gift Taxes.
Administration expenses include: fees paid to the fiduciary for administering the estate; attorney, accountant, and return preparer fees; expenses incurred for the production or collection of taxable income; expenses incurred for the management, conservation, or maintenance of property held for the production of taxable income; expenses in connection with the determination, collection, or refund of any tax.
References:
- Publication 559, Survivors, Executors, and Administrators
- Publication 950, Introduction to Estate and Gift Taxes
- Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
- Form 1041, U.S. Income Tax Return for Estates and Trusts
What is a Pure Trust?
A so-called pure trust is an arrangement that purports to create a separate entity without actually altering the taxpayer's control over the property or business transferred to the pure trust. Generally, the trust issues certificates that represent ownership of the trust. Notice 97-24 addresses certain abusive trust arrangements. Often "pure trusts" are involved in those arrangements. The pure trust may be treated as a sham for federal tax purposes depending on the trust term and its actual operation. Therefore, the taxpayer who transfers property or business to the trust must report all the income earned by the trust and is liable for the taxes.
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I am considering a tax shelter investment. How can I recognize an abusive tax shelter?
Tax shelters can reduce current tax liability by offsetting income from one source with losses from another source. The IRS allows some tax shelters, but will not allow a shelter which is "abusive." An abusive shelter generally offers inflated tax savings which are disproportionately greater than your actual investment placed at risk. Generally, you invest money to generate income. However, an abusive tax shelter generates little or no income, and exists solely to reduce taxes unreasonably. In comparison, a legitimate tax shelter often produces income and involves a risk of loss proportionate to the expected tax benefit. Abusive tax shelters are often marketed in terms of how much you can write off in relation to how much you invest. This "write off" ratio is often much greater than one-to-one. A series of tax laws has been designated to halt abusive tax shelters.
Any person participating in an abusive tax shelter may be penalized up to $1,000, in addition to being liable for the full tax irrespective of the shelter.
For additional information, refer to Tax Topic 454, Tax Shelters.
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What is alternative minimum tax?
The tax laws give preferential treatment to certain kinds of income and allow special deductions and credits for some kinds of expenses. The alternative minimum tax attempts to ensure that all individuals who benefit from these tax advantages will pay at least a minimum amount of tax. The alternative minimum tax is a separate tax computation that, in effect, reduces the benefit of certain deductions and credits, thus creating a tax liability for an individual who would otherwise pay little or no tax. You may have to pay the alternative minimum tax if your taxable income for regular tax purposes, plus any of the adjustments and preference items that apply to you, is more than a specified exemption amount. To determine if you may be subject to the alternative minimum tax, refer to the Form 1040 Instructions for line 48, or refer to Form 6251, Alternative Minimum Tax - Individuals.
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I have a question about my state taxes. Can you help me?
We address only federal tax and procedural issues on this site. If you have questions about state taxes, visit the Federation of Tax Administrators (FTA) links to State Tax Forms. You may be able to locate the state tax information you need. Otherwise, you will need to contact your local state tax office.
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The IRS corrected my return and sent me an additional refund. Does this mean I am also entitled to an additional refund on my state tax return?
Whether you are entitled to an additional state tax refund depends on the nature of the change which was made to your federal return. For example, if on your federal tax return, you used the wrong line on the tax tables to figure your tax, this may not have an impact on your state tax return. However, if the change was made to the amount of your taxable income on your federal return, it may have an impact on your state tax return. Contact your state tax office for additional information. It is helpful to have a copy of your tax returns (federal and state) and a copy of the IRS notice when you call.
To access the state you need to direct your question to, please go to our Alphabetical State Index.
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