37% Estate Income Tax. Ouch!

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JohnYaker
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Location: Dallas, Texas

37% Estate Income Tax. Ouch!

Post by JohnYaker » Sat Oct 12, 2019 3:47 pm

My deceased mother's estate is largely comprised of U.S. Savings Bonds and T-Notes that have earned significant interest income over the years. Income tax has not yet been paid on any of this interest income.

If the estate redeems/sells these securities, my understanding is that it will get hit with a 37% income tax rate (IRS Form 1041) on all the years of accrued interest earnings above $12,750. Is this correct?

Any ways to reduce the tax burden? Can/should the estate Executor transfer securities to the beneficiaries instead of selling them?

HomeStretch
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Re: 37% Estate Income Tax. Ouch!

Post by HomeStretch » Sat Oct 12, 2019 3:54 pm

Perhaps the estate will have expenses that will offset the income, all or in part, if the estate reports the income.

bsteiner
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Re: 37% Estate Income Tax. Ouch!

Post by bsteiner » Sat Oct 12, 2019 4:16 pm

In addition to offsetting the income with administration deductions as HomeStretch suggests, you could accrue the interest on the savings bonds on the decedent's final return, or distribute the bonds in kind and let the beneficiaries keep them or cash them in, or make distributions which would carry out the income.

The lawyer handling the estate should advise as to which of these is best under the circumstances.

cas
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Re: 37% Estate Income Tax. Ouch!

Post by cas » Sat Oct 12, 2019 5:55 pm

JohnYaker wrote:
Sat Oct 12, 2019 3:47 pm

If the estate redeems/sells these securities, my understanding is that it will get hit with a 37% income tax rate (IRS Form 1041) on all the years of accrued interest earnings above $12,750. Is this correct?
Plus 3.8% Net Investment Income Tax on top of the 37% (if the interest income is retained in the estate and none of the things the previous posters suggest are done.)

JGoneRiding
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Re: 37% Estate Income Tax. Ouch!

Post by JGoneRiding » Sat Oct 12, 2019 6:34 pm

You definitely need to talk to someone. I would have thought you would get a step up.

Geologist
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Re: 37% Estate Income Tax. Ouch!

Post by Geologist » Sat Oct 12, 2019 8:42 pm

JGoneRiding wrote:
Sat Oct 12, 2019 6:34 pm
You definitely need to talk to someone. I would have thought you would get a step up.
The increase in value of savings bonds is not a capital gain, but an accumulation of interest. There is no step-up for this: tax on the interest must be paid eventually.

Grt2bOutdoors
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Re: 37% Estate Income Tax. Ouch!

Post by Grt2bOutdoors » Sat Oct 12, 2019 9:00 pm

Were the bonds only owned as individual title and not jointly or as paid on death beneficiary? Make sure that those bonds are actually part of an estate first.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

donall
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Re: 37% Estate Income Tax. Ouch!

Post by donall » Sat Oct 12, 2019 9:04 pm

I would recommend speaking to an accountant who specializes in filing 1041s. As already said, accountants can find expenses to offset any income from the estate. Estate income is any income after death. So if the savings bonds are redeemed, there is interest income for the estate. Estate income is typically distributed to the beneficiaries through a K-1. Beneficiaries then pay taxes at their tax rate.

If savings bonds are transferred to beneficiaries then the beneficiaries will assume taxes and pay the taxes on the interest when they are redeemed. The Treasury transfer form has a box that you would check indicating you are responsible for paying taxes on the interest.

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