Thursday, October 06, 2005

Form 706 for 2005 Published - New Form shows new State Death Tax Deduction

Category: Estate and Inheritance Tax, Probate and Estate Administration

At long last the Form 706 - Federal Estate Tax Return - for decedents dying in 2005 has been released by the IRS. The form adds a new Line 3b for the "State Death Tax Deduction", recognizing the change from a State Death Tax Credit to a Deduction for State Death Taxes paid.

The Form 706 Instructions set forth how to claim the new Deduction as follows:

"The estates of decedents dying after 12/31/2004 will be allowed a deduction for state death taxes, instead of a credit. Beginning in 2005, the state death tax credit is repealed. You may take a deduction on line 3b for estate, inheritance, legacy, or succession taxes paid as the result of the decedent’s death to any state or the District of Columbia. You may claim an anticipated amount of deduction and figure the federal estate tax on the return before the state death taxes have been paid. However, the deduction cannot be finally allowedunlesss you pay the state death taxes and claim the deduction within 4 years after the return is filed, or later (see section 2058(b)) if:

1. A petition is filed with the Tax Court of the United States,
2. You file a claim for refund or credit of an overpayment which extends the deadline for claiming the deduction.

Note. The deduction is subject to no dollar limits.

If you make a section 6166 election to pay the federal estate tax in installments and make a similar election to pay the state death tax in installments, see section 2058(b) for exceptions and periods of limitation.

If you transfer property other than cash to the state in payment of state inheritance taxes, the amount you may claim as a deduction is the lesser of the state inheritance tax liability discharged or the fair market value of the property on the date of the transfer. For more information on the application of such transfers, see the principles discussed in Rev. Rul. 86-117, 1986-2 C.B. 157, prior to the repeal of section 2011.

You should send the following evidence to the IRS:

1. Certificate of the proper officer of the taxing state, or the District of Columbia, showing the:
a. Total amount of tax imposed (before adding interest and penalties and before allowing discount),
b. Amount of discount allowed,
c. Amount of penalties and interest imposed or charged,
d. Total amount actually paid in cash, and
e. Date of payment.

2. Any additional proof the IRS specifically requests."


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