706/1041 Deduction Allocation
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that could be taken either on the 706 or the 1041. As I
understand it, one can elect to take deductions on the 1041
by filing election within statute of limitations for 1041
year in question. Does this mean that if a person simply
takes the deductions on 1041, but doesn't make the election,
and is audited, can simply make the election at time of
audit, since audit generally occurs within statute of
limitations also? If so, of what import is the election,
other than can't reverse the election once made?
DORFMONT
rate and go up. Any deductions that can be made on either
the 1041 or 706 should be made on the 706 as a general rule
unless the 1041 will have an enormous income taxable to the
estate itself like capital gains. this is not likely to
happen.
Linda
BM3000380
than the one you answered. My client will be taking the
deductions on the 1041 (estate is not of sufficient size to
be taxable); the question is, what real purpose does filing
the election to take deductions on the 1041 serve, if one
can take the deductions on the 1041 before formally
submitting the election to do so, and the election can be
submitted within statute of limitations for the filed 1041?
Again, my question is based on my understanding that the
election to take deductions on the 1041 rather than the 706
may be made anytime within statute of limitations for the
year of the 1041 in question.
As a sidebar, besides a situation where 706 does not need to
be filed, another situation exists where it may well be
advisable to take deductions on the 1041 that might
otherwise have been take on the 706; that is the situation
where marital deduction renders non taxable the estate of
first spouse to die; in that situation, taking deductions on
the 706 "wastes" the use of the deductions. die non
DORFMONT
being filed. The fact that there is no 706 obviates the
necessity of actually electing to deduct on the 1041.
D. Stussy
> Thx for your ans, but I was actually asking a question other
> than the one you answered. My client will be taking the
> deductions on the 1041 (estate is not of sufficient size to
> be taxable); the question is, what real purpose does filing
> the election to take deductions on the 1041 serve, if one
> can take the deductions on the 1041 before formally
> submitting the election to do so, and the election can be
> submitted within statute of limitations for the filed 1041?
> Again, my question is based on my understanding that the
> election to take deductions on the 1041 rather than the 706
> may be made anytime within statute of limitations for the
> year of the 1041 in question.
Someone who has a gross estate over the threshold
("exemption" or unified credit) but a net taxable estate
under that threshold still has to file a 706 return, but
adding those expenses to such a return won't yield a tax
benefit. The election of this section provides a way to
claim a tax benefit. However, see my other reply regarding
the election itself.
> As a sidebar, besides a situation where 706 does not need to
> be filed, another situation exists where it may well be
> advisable to take deductions on the 1041 that might
> otherwise have been take on the 706; that is the situation
> where marital deduction renders non taxable the estate of
> first spouse to die; in that situation, taking deductions on
> the 706 "wastes" the use of the deductions. die non
I fully agree here.
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worded my question poorly, as info you provided actually
addresses another issue. Let me try wording it another way:
If no election to take deductions on the 1041 has been made,
and the 1041 is filed with the deductions taken on the 1041
and IRS audits return, what is to prevent one from making
election at time of audit, since I think time limit for
election is within statute of limitations for year of 1041
in question and, normally, audit would also be within
statute of limitations. ie; why bother with the election
before being audited.
I hasten to add I may be missing something very basic here.
Bruce Steiner
> As a sidebar, besides a situation where 706 does not need to
> be filed, another situation exists where it may well be
> advisable to take deductions on the 1041 that might
> otherwise have been take on the 706; that is the situation
> where marital deduction renders non taxable the estate of
> first spouse to die; in that situation, taking deductions on
> the 706 "wastes" the use of the deductions.
That is generally not correct. If you take the deductions
on the fiduciary income tax return instead of the estate tax
return, you reduce the credit shelter and increase the
marital share, thus potentially increasing the estate tax in
the surviving spouse's estate.
See my article on this in the August 1991 issue of the CPA
Journal.
Bruce Steiner, attorney
NYC and Hackensack, NJ
also admitted in FL
Michael T. Wing, CPA
> As a sidebar, besides a situation where 706 does not need to
> be filed, another situation exists where it may well be
> advisable to take deductions on the 1041 that might
> otherwise have been take on the 706; that is the situation
> where marital deduction renders non taxable the estate of
> first spouse to die; in that situation, taking deductions on
> the 706 "wastes" the use of the deductions. die non
I'm not sure it is that simple. In a typical case - where the
marital deduction is defined by a "formula clause", or as the
"residual" of the estate - an estate tax *can* result if the
administrative expenses aren't deducted on the 706 (rather
than on the 1041).
Example: "I leave the residual of my estate to my spouse."
Gross estate = $1,000,000. Administrative expenses = $100,000.
Residual of estate = $900,000. The maximum allowable marital
deduction in this case would be $900,000. Therefore, if the
administrative expenses aren't claimed on the 706, $100,000 of
the gross estate remains "exposed" to estate tax on the 706.
There are various decisions on this issue in the various
federal circuits. Perhaps others more knowledgeable than I can
enlighten us as to the current status. <g>
MTW
-Michael T. Wing, CPA (WA)
mailto:mike...@versatax.com
http://www.versatax.com/
BM30003700
beneficiary, and where surviving spouse was 40 years old.
Also, full unified credit was available on Form 706, which
reduced tax on estate to zero without taking any "706/1041"
deductions on the 706.
Result of placing these deductions on Form 1041 was to
reduce taxable income, in 39.6% bracket, to surviving
spouse, as Form 1041 income flowed through 100% to surviving
spouse on 1041 K-1.
Given above scenario, and fact that threshold for estate
size to be taxed has increased, and continues to increase
due to tax law enacted since the 1991 arrticle you referred
to, along with at least reasonable possibility that estate
taxes will be further reduced by future legislation, I don't
understand how taking deductions being taken on the 706 of
the fist spouse to die would be in best interest of suriving
spouse.
Bruce Steiner
> I have a situation where surviving spouse was sole
> beneficiary, and where surviving spouse was 40 years old.
> Also, full unified credit was available on Form 706, which
> reduced tax on estate to zero without taking any "706/1041"
> deductions on the 706.
Except to the extent permitted by the recent Hubert case,
and except with respect to deductions in respect of a
decedent, the above statement is incorrect.
For example, suppose the husband dies first, with an estate
of $2 million, and a typical marital/credit shelter Will.
Suppose the administration expenses are $100,000.
If you claim the administration expenses on the estate tax
return, the net estate before the marital deduction is $1.9
million, which goes $1.25 million to the marital share and
$650,000 to the credit shelter.
If you instead claim the administration expenses on the
fiduciary income tax return, the net estate (for estate tax
purposes) before the marital deduction is $2 million. Since
you didn't deduct the $100,000 of administration expenses,
you need a marital share of $1.35 million in order to
eliminate the estate tax. This leaves a taxable estate of
$650,000. But there is only $550,000 left for the credit
shelter (since the other $100,000 was used to pay the
administration expenses).
Whether to deduct the administration expenses on the estate
tax return or the fiduciary income tax return should be
considered on a case by case basis, though more often than
not we take them on the estate tax return.
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obvious.
I went to CPA Journal article you authored, also. In both
the example you gave here and the article in the CPA Journal
article, it seems implicit that the surviving spouse did not
receive all property of the estate.
In situation I referred to, spouse did receive all property.
Using example numbers you posted, and a situation where
surviving spouse received all property, would the only
consequence of taking $100,000 administration expenses on
1041 be that surviving spouse's taxable estate would be $2
million, whereas the surviving spouse's taxable estate would
be $1.9 million if instead administration expenses were
taken on 706?
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ago; deceased did not leave a will.
Dan Evans
> In situation I referred to, spouse did receive all property.
>
> Using example numbers you posted, and a situation where
> surviving spouse received all property, would the only
> consequence of taking $100,000 administration expenses on
> 1041 be that surviving spouse's taxable estate would be $2
> million, whereas the surviving spouse's taxable estate would
> be $1.9 million if instead administration expenses were
> taken on 706?
If the gross estate is $2,000,000 and the administration
expenses are $100,000, the surviving spouse is going to end
up with $1,900,000 (before taxes) regardless of whether the
expenses are deducted on the 706 or the 1041. (I mean, the
money has to come from *somewhere*.)
In the absence of disclaimers, lifetime gifts, assets
passing outside of the estate to anyone other than the
surviving spouse, or anything else that could use up the
unified credit or result in federal estate tax, the expenses
should be deducted on the 1041, not the 706. As noted
above, the surviving spouse is going to receive $1,900,000
no matter what you do, so there is an estate tax marital
deduction of $1,900,000. If there is a deduction of
$100,000 for expenses, then there is a taxable estate of $0,
and no tax. If there is no deduction for expenses, there is
a taxable estate of $100,000, and no tax, due to the unified
credit. Either way there is no federal estate tax, so the
expenses should be claimed on the 1041, where they might do
some good.
(The above assumes that all of the expenses are paid out of
principal, not income, and so ignores the issues raised by
the Hubert decision. If the estate earned $100,000 in income
during the administration, and if the expenses could be paid
out of income, and not principal, then the estate could
claim a marital deduction of $2,000,000 and a deduction of
$100,000 of administrative expenses on the income tax
return. However, the surviving spouse still ends up with
$2,000,000, being the $2,000,000 estate, plus $100,000 of
income, less $100,000 of expenses, regardless of whether the
expenses are paid out of income or principal and regardless
of whether they are claimed as estate tax deductions or
income tax deductions.)
Hope that this is sufficiently confusing.
**Dan Evans
**I am not your lawyer unless
**you have sent me a check.
Michael T. Wing, CPA
> In the absence of disclaimers, lifetime gifts, assets
> passing outside of the estate to anyone other than the
> surviving spouse, or anything else that could use up the
> unified credit or result in federal estate tax, the expenses
> should be deducted on the 1041, not the 706.
Right. But in a more typical situation where unified credit
equivalent has already been used (to fund a bypass trust, or
whatever), a failure to claim to the administrative expenses
on the 706 *will* lead to a tax liability - and it can't be
offset by the marital deduction (outside of the Hubert
situation).
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by asset of estate (business generating taxable income of
400,000 per year).
Bruce D. Steiner
> I went to CPA Journal article you authored, also. In both
> the example you gave here and the article in the CPA Journal
> article, it seems implicit that the surviving spouse did not
> receive all property of the estate.
>
> In situation I referred to, spouse did receive all property.
>
> Using example numbers you posted, and a situation where
> surviving spouse received all property, would the only
> consequence of taking $100,000 administration expenses on
> 1041 be that surviving spouse's taxable estate would be $2
> million, whereas the surviving spouse's taxable estate would
> be $1.9 million if instead administration expenses were
> taken on 706?
Where the decedent did not take full advantage of his/her
credit shelter, claiming the administration expenses on the
income tax returns is a way of using some of the unused
credit shelter, as in your example.
If 9 months have not yet passed, the spouse should discuss
the possibility of a disclaimer with counsel.