The 2010 Tax Act Election

Executors of estates of decedents dying last year have a choice: Pay the retroactive estate tax and get a date-of-death basis or opt out and into modified carryover basis. It's not a decision for the faint of heart

Taxes are a contentious political issue. Elections for positions from county supervisor to the United States president have been won or lost on promises about and voting records on taxes. Now, with the passage of the Tax Relief, Unemployment and Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Tax Act), lawmakers have decided to share the joy with executors of estates, putting them in a position in which they must decide which of two tax schemes will apply to estates of decedents dying in 2010. Whatever decision they make, it's sure to draw ire from the beneficiaries of some estates.

The 2010 Tax Act reinstated retroactively the estate tax for estates of decedents dying after Dec. 31, 2009.1 For decedents dying in 2010 with taxable estates of more than $5 million, the tax rate is 35 percent. In addition, the 2010 Tax Act repealed the modified carryover basis rules. Those rules say that the income tax basis for determining gain or loss upon a taxable sale or exchange of inherited property is the lesser of its fair market value (FMV) at the decedent's death or the decedent's income tax basis in the property (that is, what the decedent paid for the property, as adjusted for the value of certain improvements, depreciation or a host of other items specified in the Internal Revenue Code). Instead, the 2010 Tax Act reinstated the “date-of-death” basis of property, which means that for income tax purposes, beneficiaries inherit the property at its FMV as of the date of the decedent's death, regardless of what the decedent paid for the property.

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