Other (Alternative Minimum Tax, Estates, Trusts, Tax Shelters, State Tax Inquiries)
You can deduct the expenses incurred by an estate for its administration either as an expense against the estate tax or the annual income tax against the estate.
- You may deduct the expense from the gross estate in figuring the federal estate tax on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, or
- You may deduct the expense 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, you cannot claim these expenses for both estate tax and income tax purposes.
- In most cases, these rules also apply to expenses incurred in the sale of property by the estate. For more information, refer to Publication 559, Survivors, Executors, and Administrators. It is designed to help those in charge (e.g., an executor or administrator) of the property (estate) of an individual who has died.
In general, administration expenses deductible in figuring the estate tax include:
- Fees paid to the fiduciary for administering the estate;
- Attorney, accountant, and return preparer fees;
- Expenses incurred for the management, conservation, or maintenance of property;
- Expenses in connection with the determination, collection, or refund of the estate's tax liability.
Taxpayers can minimize their tax liability through legitimate investment, but they cannot invest in abusive tax avoidance transactions to minimize or eliminate their tax liability. An abusive tax avoidance transaction:
- Offers inflated tax savings that are disproportionately greater than the actual investment placed at risk. Generally, an abusive tax avoidance transaction generates little or no income or capital appreciation.
- Is a transaction in which a significant purpose is the avoidance or evasion of federal income taxes. In comparison, a legitimate investment produces income or capital appreciation and involves a risk of loss proportionate to the investment. Additionally, a legitimate investment has a business purpose other than the reduction of taxes.
- Is often marketed in terms of how much you can reduce your tax liability.
- The American Jobs Creation Act of 2004, which contains many provisions that will affect abusive tax avoidance transactions.
- Notice 2009-59, which contains a list of 34 transactions that the IRS has identified as listed transactions. Listed transactions are abusive tax avoidance transactions. The most up-to-date list of all listed transactions can be found at Recognized Abusive and Listed Transactions.
- Notice 2009-55, which contains a list of 4 transactions that the IRS has identified as transactions of interest. A transaction of interest is a transaction that the IRS and Treasury Department believe has a potential for tax avoidance or evasion, but about which the IRS and Treasury Department lack enough information to determine that the transaction is inherently a tax avoidance transaction. The most up-to-date list of all transactions of interest can be found at Transactions of Interest.
No, reverse mortgage payments aren't taxable. Reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.
- With a reverse mortgage, you retain title to your home.
- Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die.
- Interest (including original issue discount) accrued on a reverse mortgage isn't deductible until you actually pay it (usually when you pay off the loan in full). Also, a deduction of interest may be limited because a reverse mortgage generally is subject to the limit on home equity debt, which is not deductible unless the proceeds are used to buy, build, or substantially improve the home that secures the loan. For information on deducting mortgage interest and the debt limit that applies, see Publication 936, Home Mortgage Interest Deduction.
If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy less any refunded premiums, rebates, dividends, or loans that you neither repaid nor previously included in your income. You should receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. showing the gross proceeds and the taxable part. Report these amounts on lines 4a and 4b of Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors (PDF) .
Generally, the required minimum distribution (RMD) must be figured separately for each account. You can calculate the RMD for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Use the:
- Uniform Lifetime Table (Table III) if you're an unmarried owner, an owner whose spouse isn't the sole beneficiary, or an owner whose spouse isn't more than 10 years younger;
- Joint and Last Survivor Table (Table II) if you're a married owner whose spouse is both more than 10 years younger and the sole beneficiary of the account; and
- Single Life Expectancy Table (Table I) if you're a beneficiary of an account.
You can use Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution, in Publication 590-B.
Note: If you have more than one IRA, you can total the required distributions for all the IRA accounts and then satisfy the requirement by taking distributions from any one (or more) of the IRA accounts.