Monday, October 31, 2005

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

Category: Estate and Inheritance Tax, Tax Law and Planning

From the IRS, a quick summary of some inflation adjustments to 2006 tax planning. Revenue Procedure 2005-70 contains a complete list of all 2006 inflation adjustments.

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

WASHINGTON - Personal exemptions and standard deductions will rise, tax brackets will widen and individuals will be able to make larger tax-free gifts in 2006, thanks to inflation adjustments announced today by the Internal Revenue Service.

By law, a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being modified for 2006. Key changes affecting 2006 returns, filed by most taxpayers in early 2007, include the following:

The value of each personal and dependency exemption, available to most taxpayers, will be $3,300, up $100 from 2005.

The new standard deduction will be $10,300 for married couples filing a joint return, $5,150 for singles and $7,550 for heads of household. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket will be $61,300, up from $59,400 in 2005.

The annual gift tax exemption will be $12,000, up from $11,000 in 2005.
Revenue Procedure 2005-70, containing a complete rundown of inflation adjustments, is posted on the IRS Web site and will appear in Internal Revenue Bulletin 2005-47, dated Nov. 21, 2005.

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,
or
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."