Filing extension, how to estimate payment (Inheritance, no K1 yet)?

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jkers
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Joined: Sat Oct 13, 2018 12:43 am

Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by jkers »

Hello Bogleheads!

I inherited ~300k in 2018, and am looking for advice on how to handle getting a tax extension (and if I should prepay), since I don't know yet what my tax exposure is regarding the inheritance.

The trustee of the estate let me know that the firm handling taxes for the trust will not have the Form 1041’s (Trust and Estate returns) prepared in time to issue K-1’s in a timely manner and to "go ahead and file for 2018 extensions for your own federal and state returns. No doubt your tax advisors have told you that an extension of the deadline to file, is not an extension of the deadline for paying any estimated 2018 tax liability, which must be paid by April 15."

The tax accountant estimates $112k in capital gains income in the Trust. I'm not sure what that's comprised of (looks like "securities" on the accounting of the trust), or if that $112k in capital gains is applied to/divided by all beneficiaries of the trust (all charities, all family members, etc) or divided between other specific beneficiaries such as myself and other beneficiaries that received a "larger" part of the estate. The estate was right around 2mil in value the First Accounting of the Trust, so my share/inheritance is roughly 15% of the estate if that matters.

I have discovered (not having a tax advisor other than my friend TurboTax), filing an extension doesn't preclude me from paying estimated taxes on my portion of the capital gains. Just looking at how to guess what my portion of the capital gains income may be or what, if any, I should prepay when filing for an extension, to avoid any penalties and interest.

Just not having filed for an extension before, I was trying to gauge the process. It would feel weird to file an extension, send the IRS some number of thousands (?) of dollars in the hope its enough to cover any tax owed on my portion of the $112k and not be charged interest/fees later on, when I do get a K1 at some point.

I have plenty of liquid $ to send the IRS a prepayment, and when going through most of the steps in TurboTax, it's estimating a refund of 4k based on all the non inheritance income/deduction math. I feel funny saying "here's a bunch of money, hopefully it's more than enough and you send most of it back to me later", and not sure how to gauge what to send to the IRS.

Any feedback would be greatly appreciated.
Thank you for your time!
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FiveK
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Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by FiveK »

jkers wrote: Fri Apr 12, 2019 10:43 am I'm not sure...if that $112k in capital gains is applied to/divided by all beneficiaries of the trust (all charities, all family members, etc) or divided between other specific beneficiaries such as myself and other beneficiaries that received a "larger" part of the estate.

...not sure how to gauge what to send to the IRS.
Until you resolve the issue in the first paragraph (i.e., how much and what type of income you have received for 2018), there is no good way to resolve the issue at the end of the quote.

If you can get an estimate of the income, enter the estimate in TT and send the IRS the resulting payment due (assuming TT indicates such) along with making the filing extension request.
livesoft
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Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by livesoft »

Yesterday I filed for an extension using IRS Direct Pay which cost no filing fee, no postage stamp, and no need to fill out Form 4868. I had to verify my identify by using information found on my previous tax return. I did pay an amount from my checking account for the estimated taxes that I will owe with an free ACH transfer that was completed not overnight, but before 5 pm.

So one can use TT to estimate the amount to pay, but do not pay them to actually do the extension.

As for your estimated amount, I don't think there is any sin in overpaying and getting a refund. Your current $4K of refund will cover about $4,000 / 0.15 = $26,666 of capital gains if you pay LT cap gains taxes at 15%. But if you will have $112K of LT cap gains, that won't cover it.

Years ago, we were in a similar situation when my MIL passed away. The inherited assets we received had gone up almost 50% after she died and heirs were liable for the taxes on those gains. I had called up the executor and knew approximate amounts for everything even though the 1041 and our K-1 was not available.

So in your shoes, I would start by calling up the executor and getting more information because the taxes you may have to pay could be more than $5,000 beyond your current refund. That does not mean they need to send you any preliminary forms, but they do need to give you more information such as why so much cap gains when 2018 was a down year in the stock market? Maybe from selling a home? How much of the approximate $112K is your share? I think they sort of know the numbers better, but just will not get the forms completed in time. It is even possible that they are mistaken about the amount of cap gains because they don't understand how they work. At least you can find out if the $112K is your liability or not.
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thx1138
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Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by thx1138 »

jkers wrote: Fri Apr 12, 2019 10:43 am I feel funny saying "here's a bunch of money, hopefully it's more than enough and you send most of it back to me later", and not sure how to gauge what to send to the IRS.
You already did this all last year at every paycheck via withholding and indeed now they are going to send you back $4K so I don’t see what the concern is.

I read the post details rather quickly but it sounds like a good estimate of your portion of the estate is 15% and the estate has about 112k in capital gains meaning about 17k in capital gains for you. If they are long term gains then rate is 15% and you owe about $2500 in tax which is less than your refund so you don’t need to make any additional estimated payment. If short term gain then taxed at your marginal rate but would still be around your refund amount. Anyway if I’ve understood the numbers in your post correctly worst case send them a few thousand and it get some or all of it back later.
livesoft
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Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by livesoft »

BTW, if you are wondering about this, then ALL the heirs should be wondering about this, so if you take the initiative to get more information, then that will be helpful to all of them. And it will help avoid misunderstandings.

I'll give an example of a misunderstanding that I experienced: The executor of my MIL's estate told everyone that there would be no taxes to pay. The lawyer handling the estate said there would be no taxes to pay. It turns out that the lawyer meant "no inheritance taxes" and "no estate taxes" for the heirs which the executor thought meant something else. It turned out that there were state inheritance taxes (but not federal) and of course, the heirs got taxed on things reported on the K-1's they received from the estate for the investment income after the date of death.
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Topic Author
jkers
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Joined: Sat Oct 13, 2018 12:43 am

Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by jkers »

Thanks guys!

I checked with the trustee about this and here is the update:
"Only the “Remainderman” beneficiaries (I.e. you and the other three) receive the capital gains. I believe you will share them on equal parts, as you share in the remainder of the estate (I.e. what remains after the specific bequests). Hope this helps"

So it appears that the 112k in capital gains should be divided by 4, leaving each of us with ~28k each in capital gains. Not sure if they are short/long term or the exact tax rate I'll pay on them but 28k x .20 = $5600, so it would appear my current projected refund should cover most of this. I think I'll send the IRS ~5k when filing for extension just in case, and hope to get most of it back.

Appreciate the help!
cas
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Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by cas »

jkers wrote: Sat Apr 13, 2019 3:51 pm Not sure if they are short/long term or the exact tax rate I'll pay on them but 28k x .20 = $5600, so it would appear my current projected refund should cover most of this. I think I'll send the IRS ~5k when filing for extension just in case, and hope to get most of it back.
(Bold added by me.)

Niggly little detail, but if your AGI is high enough that you think you'll be in the 20% rate for long term capital gains, you'll also owe Net Investment Income Tax on the LTCG (or short term cap gains) (additional 3.8% ... so 23.8% total). (AGI threshold for NIIT to kick in is $200,000 (single)/$250,000 (MFJ).)
Greenman72
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Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by Greenman72 »

Why is every single person on Bogleheads completely resist the idea of paying a professional to do anything?

You can either worry about this and do it yourself, or you can pay somebody else to do it. That is, you can either spend 10 hours worrying about it, give yourself a migraine, and forego $200/hr (that's $2,000, just FYI), or you can pay a CPA/EA to do it for $500. We (I'm a CPA) have the tools and the knowledge available to us that it will take you years to accumulate. . I can answer your question immediately, file the extension, put your estimate into my software and give you a precise number (subject to the GIGO problem, but at least the output will be correct) in a fraction of the time and expense that it would take you to do it.

But by all means--keep doing what you do.

NEVER PAY A PROFESSIONAL. --Jack 3:16
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FiveK
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Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by FiveK »

Greenman72 wrote: Sat Apr 13, 2019 4:52 pm ...subject to the GIGO problem....
Which, until the OP's post ~2 hrs ago, is exactly the problem faced here.

May or may not be worth paying someone else when the correct information is available, but until the inputs are known even the best professional can't calculate the correct output.
burbank
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Re: Filing extension, how to estimate payment (Inheritance, no K1 yet)?

Post by burbank »

Greenman72 wrote: Sat Apr 13, 2019 4:52 pm Why is every single person on Bogleheads completely resist the idea of paying a professional to do anything?
I can't speak for every person on this forum, but I bet the answer is basically that "good help is hard to find." Bogleheads may have been burned by paying someone else for a job and then finding it was done poorly, perhaps even so poorly that they had to redo the work. A paid expert may be too busy to answer questions when needed, may answer unclearly, or may be careless in ways that prompt scrutiny.

There's also a sort of self-selection bias where you only see posts when people need help rather than numerous times a Boglehead just hired a professional and didn't post about it. But sincere kudos to you for answering your clients' questions immediately with expert insight. Not everyone gets that!
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