With all the hubbub over the Tax Cuts and Jobs Act (TCJA), new withholdings, and the simplified 1040, you could be forgiven for not being up to date on IRS Form 706, says tax pro Arthur Werner. But that does not mean you can afford to ignore it: 706 is the last line in determining owed estate tax.
The form is confusing as-is, says Werner, who details its intricacies in his Eli Financial webinar, “Preparing Form 706: The Federal Estate Tax Return.” There are plenty of ifs and buts scattered throughout the form, and while the federal government requires only those estates that meet certain criteria to file Form 706, there are a few situations where a timely submittal is required from estates that otherwise do not qualify.
Key Prep Tip: Know the New Exemption Amount
Internal Revenue Service (IRS) Form 706 is used by an executor of a decedent’s estate to calculate the estate tax owed under Chapter 11 of the Internal Revenue Code. The estate tax, explains Investopedia, is what is levied on an heir’s inherited portion of an estate if the value of the estate exceeds an exclusion limit.
“If the value of your estate is over the current exemption amount when you die, your estate will owe tax on the excess amount at the applicable Estate Tax rate,” notes efile.com. “The Estate Tax is paid according to the tax rates in place in the year of the person’s death.”
The 2017 tax year’s exemption amount was $5,490,000; that figure gets a huge jump for 2018 thanks to TCJA. It is now $11.18 million, and it will further increase to $11.4 million in 2019, the IRS reports.
More: The exemption is portable for married couples so that, if one spouse dies before another and their estate does not reach the $5,490,000 limit (or whatever it is for the year in question), the other spouse or their estate may use the remaining amount.
Get to Know the Deductions
When figuring IRS Form 706 into a federal estate tax return, make sure to tally all the available deductions, counsels efile.com.
The 7 deductions are:
- Marital deduction (popular; anything transferred to a surviving spouse may not be taxed)
- Charitable deduction (but: the charity must be qualified)
- Mortgage and debt deduction (the taxable estate can be reduced by the remaining amount of a mortgage or other unpaid debts)
- State death taxes (deduct these if your state or district charges them)
- Foreign death taxes (if you pay death taxes to a foreign country, back those out, too)
- Funeral expenses (those paid out of the estate are not taxed)
- Estate administration expenses (you can deduct admin fees and any losses incurred by the estate during its transaction, including attorney and appraisal fees, storage and maintenance costs, and interest expenses)
Meet the Generation-Skipping Tax
Another key component to filing Form 706 is the generation-skipping tax feature. It is meant to prevent the deceased from lowering a super-large estate’s tax burden by skipping a generation—i.e., leaving the estate to grandkids instead of children. The generation-skipping tax, says Investopedia, could be as much as 40 percent. It also is assessed in addition to any gift or estate taxes which may apply.
The generation-skipping tax exemption amount has risen, too. In 2016 it was $5.45 million; that bumped up to $5.49 million in 2017, and it will basically double for 2018 to $11.18 million.
Tip: “Married couples can double these exemption amounts, resulting in a significant cash and property that can be transferred without taxation,” according to a The Balance article.
Sure, Form 706 is confusing, says Werner, host of “Preparing Form 706: The Federal Estate Tax Return.” Luckily, there are great resources out there for tax pros readying for a new filing season.
