Death & taxes

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Death & taxes

Postby 2stepsbehind » Sat Jul 27, 2013 11:53 am

I'm reading up on estate income taxes and want to make sure I'm understanding this correctly. If a person on 5/1/11 is awarded 50 performance units of a company stock which is set to vest 5/1/13, the person passes away 5/1/12, but the company goes ahead and pays out the 50 units as scheduled on 5/1/13 is it true that the value of the 50 units on 5/1/3 would be considered ordinary income to the estate and any gains would be subject to capital gains taxes? Same hypo, but instead the company pays out the performance units to the spouse of the deceased; it would still be ordinary income, but this time to the spouse, correct? Would the spouse be eligible to open a spousal ira based on this payment? Does the analysis change if it was a bonus payment for the last year in cash verses stock?
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Re: Death & taxes

Postby 2stepsbehind » Sun Jul 28, 2013 6:40 pm

anyone?
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Re: Death & taxes

Postby manwithnoname » Sun Jul 28, 2013 7:06 pm

See IRS Pub 525 P 11-13 for income tax to employee. See Pub 559 for income tax consequences to estate/beneficiaries.
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Re: Death & taxes

Postby 2stepsbehind » Sun Jul 28, 2013 7:52 pm

Thanks, but 559 doesn't speak to whether it would be earned income for the purposes of contributing to an ira
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Re: Death & taxes

Postby MarkNYC » Sun Jul 28, 2013 8:47 pm

2stepsbehind wrote: If a person on 5/1/11 is awarded 50 performance units of a company stock which is set to vest 5/1/13, the person passes away 5/1/12, but the company goes ahead and pays out the 50 units as scheduled on 5/1/13 is it true that the value of the 50 units on 5/1/3 would be considered ordinary income to the estate...? Same hypo, but instead the company pays out the performance units to the spouse of the deceased; it would still be ordinary income, but this time to the spouse, correct? Would the spouse be eligible to open a spousal ira based on this payment?

I'm not sure it would be proper, but if the employer decides to pay any portion of a deceased employee's unpaid compensation to the surviving spouse, the income should not be reported in the form of "compensation" to the surviving spouse. The deceased employee performed the services, and "earned income" is not transferable from one individual to another. And if the employee died 5/1/12 and the income was paid to the surviving spouse on 5/1/13, the surviving spouse will be filing single in 2013 and there is no spousal IRA contribution for a taxpayer filing single.
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Re: Death & taxes

Postby Random Poster » Sun Jul 28, 2013 8:50 pm

I'm wondering how often the hypo presented in the OP occurs.

In my experience, the to-be-vested RSUs would pay out immediately upon the death of the employer (i.e., the remaining portion vests immediately), and not on the usual vesting schedule.
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Re: Death & taxes

Postby 2stepsbehind » Sun Jul 28, 2013 11:14 pm

MarkNYC wrote:
2stepsbehind wrote: If a person on 5/1/11 is awarded 50 performance units of a company stock which is set to vest 5/1/13, the person passes away 5/1/12, but the company goes ahead and pays out the 50 units as scheduled on 5/1/13 is it true that the value of the 50 units on 5/1/3 would be considered ordinary income to the estate...? Same hypo, but instead the company pays out the performance units to the spouse of the deceased; it would still be ordinary income, but this time to the spouse, correct? Would the spouse be eligible to open a spousal ira based on this payment?

I'm not sure it would be proper, but if the employer decides to pay any portion of a deceased employee's unpaid compensation to the surviving spouse, the income should not be reported in the form of "compensation" to the surviving spouse. The deceased employee performed the services, and "earned income" is not transferable from one individual to another. And if the employee died 5/1/12 and the income was paid to the surviving spouse on 5/1/13, the surviving spouse will be filing single in 2013 and there is no spousal IRA contribution for a taxpayer filing single.


Wouldn't the surviving spouse file as a qualifying widow/widower allowing them to file a joint return?
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Re: Death & taxes

Postby MarkNYC » Sun Jul 28, 2013 11:31 pm

2stepsbehind wrote:
MarkNYC wrote: And if the employee died 5/1/12 and the income was paid to the surviving spouse on 5/1/13, the surviving spouse will be filing single in 2013 and there is no spousal IRA contribution for a taxpayer filing single.


Wouldn't the surviving spouse file as a qualifying widow/widower allowing them to file a joint return?

Only if during 2013 the surviving spouse had a dependent child living with her for the full year. Even in that situation, she cannot file a "joint" return. She would be able to file as a "qualifying widow" which allows use of joint tax rates; and there would still be no spousal earned income in 2013 to support a spousal IRA contribution.
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Re: Death & taxes

Postby 2stepsbehind » Mon Jul 29, 2013 12:13 am

good stuff. thanks MarkNYC.
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