Today I am going to talk to you about two of the greatest inevitabilities in life: death and taxes. If we don't have our finances in order when our ultimate expiration date comes, we could leave behind a mess for our heirs and our family members and loved ones to have to work through.
Video Transcript - Death and Taxes
It's time to get down to the brass tacks. My name is Mel Sams, and I'm the managing associate of Sams CPA, and today I'm going to talk to you about two of the greatest inevitabilities in life: death and taxes. Two things which we will all encounter at some point in time. And the question is how do we get ready for it and what do we need to know to be ready for it?
All joking aside, if we don't have our finances in order when our ultimate expiration date comes, we could leave behind a mess for our heirs and our family members and loved ones to have to work through. So today I'm going to hit on a couple of topics that you need to be aware of, that we can obviously help you with in greater detail, but just want to make you aware, put these things out there for you to think about.
The first one is in the year that someone passes away, contrary to popular belief, contrary to whatever rumors may be out there, in the year that you die you still have to file a personal income tax return for that year. So if someone passes away June 30th of 2018, and here we are in January 2019 right now, they still have a tax return for 2018 that is likely due and needs to be filed. And on that tax return, we will be reporting their income and deductions and losses et cetera for that six months where they were alive. And then if there are any refunds due, if the person has a surviving spouse, the surviving spouse can claim those refunds, but if the person was single or they don't have that surviving spouse, then there's some additional paperwork we're going to have to send to the IRS for one of their beneficiaries to claim that refund.
So don't think that just because someone passes away in a particular year, they don't have to file taxes, because you may be leaving money on the table, and if three years passes, the IRS is going to keep that money; they're not going to issue those refunds. So make sure that in the year someone passes away, you get that final tax return filed for them.
The estate tax. The death tax. It's been around for years, but it's changed dramatically over the years. There was a point in time in the not so distant past, where there was a $600,000 exemption on someone's estate, meaning if you die, and you don't have that surviving spouse, and you had more than $600,000 in your possession at the time of your death, then your estate would have to pay taxes on the excess over $600,000. It's kind of crazy, because when you figure most of our 401k's are houses, just the stuff that we accumulate in life, a lot of us would find ourselves at that point as we get into our later years.
Congress changed that years ago to increase that limitation, and now in 2019, that limitation is $11,400,000. So a lot fewer people in America, a very small percentage of Americans, really have to worry about paying estate taxes. But there are still some, and there are a lot of people around here who own a lot of land, own a lot of assets that have been held in the family for a long time, and you need to make sure you're not at or exceeding that limit because if you are, there's planning that needs to take place to make sure that your beneficiaries don't have to take a chunk out of that and send it to the government. While the estate tax is an afterthought for most people, there are still people out there who it is a concern. Proper planning can be used to mitigate the cost of taxes upon death.
On the other side of the coin, inheritance: when you inherit property from somebody, what happens? Is taxable to you? Do you get a 1099? How do you show it on your taxes? What do you do? It's a common question that we get, and while I can't go into all the details in this video, what I am going to tell you is that in general, when you inherit something from somebody, unless it's an IRA, which has never been taxed, or a 401k or something like that, when you inherit something from somebody, generally, it's not a taxable event. Of course, that's not across the board, so there are cases where things can be taxable, but typically, when you inherit property from someone, you're able to increase your basis in that property to the value upon the date of their death.
Big, big thing when it comes to real estate, when you inherit Grandma's house that she's owned for 70 years, and she bought for $30,000 out Saint Pete Beach, and now it's worth $800,000. That's a big deal, when you get that property, to avoid future tax on that. But again, you need to have a good estate attorney, you need to have a good CPA helping you with that, and together, we can let you know what you have in store and what the best way to structure those inheritances are, preferably before the person passes away. It's a lot easier to do it then, as you can imagine.
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