Did someone close to you die in 2010? If so, you might want to let their family know about the special rules for handling estates.
The estate tax law changed underwent significant changes, and now in 2011 the administrator of the deceased person's estate needs to make important decisions about how to file final paperwork with the IRS.
For 2010 (and 2010 only) the estate tax was eliminated, and in its place was resurrected an older version of rules regarding the cost basis of inherited assets. This is an issue that effects everyone, even small estates that would never be subject to any estate taxes and would normally never file any returns with the IRS.
The 2010 estate tax laws provide estates with two options for how to calculate the basis of the estate's assets. Cost basis decisions will impact heirs, who will later utilize this cost basis when they sale the inherited property as part of their calculation of capital gains.
The first option is to use what's called modified carryover basis rules, basically providing that up to $1.3 of asset's basis is stepped up to fair market value, and the remaining assets keep their original cost basis. This rule has the advantage that the estate administrator can decide which assets to step up, and has the further advantage of no estate taxes.
In order to make these basis decisions, the administrator would typically have to file Form 8939 along with the Form 1040 for the deceased person. Form 8939 is currently available only as a draft version on the IRS Web site. And the deadline for filing that form is (you can probably guess) April 18th, 2011. The IRS announced, however, that Form 8939 does not need to be filed with the decedent's final 1040, and the deadline for filing the Form 8939 will be pushed back. But just when the deadline will be, along with other vital technical guidance that legal and tax professionals are still waiting for, "will be issued at a later date."
The second option available to estates is to have the newly resurrected estate tax rules apply, with unlimited step up in basis, but with the downside that the estate would be subject to any estate taxes.
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