Wednesday, March 14, 2012

Tax on income earned by estate: it may be cheaper to pay on your own return

People who receive distributions from estates in 2011 for someone who died in 2010 or 2011 may find it advantageous to pay income earned by the estate before distribution on their own returns, as these are often lower than the estate tax rates. A K-1 form is prepared (by the tax advisor) to show how to adjust the 1040 or 1041. 

Estates (even those under the $5 million) do pay tax on what they earned (not the principal). For deaths in 2010 there are special carryover strategies available that don’t apply to most people.

For 2011

Estate income:
0 to 2300
Tax = 0
2301 to 5450
Tax = (Income * .25) minus 230
5451 to 8300
Tax = (Income * .28) minus 393.50
8301 to 11350
Tax = (Income *.33)  minus 808.50
11351 and up
Tax = (Income *.35)  minus 1035.50

As one can see, the individual rates may be lower (look here)
This strategy would leave more money in the estate untaxed for future distribution or use as dictated in a will or trust document.

There are other tricky concepts like “generation skipping tax” (GST) and “clawback” that can sometimes be important in some families. The best writeup I could find quickly was by Berger and Singerman, here.

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