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Level 6

Does a decedent have to pay capital gains on federal tax return?

My father died on Thanksgiving last.  We immediately sold all stock.  There was a significant capital gains.  The total amount of his estate was distributed the next week.  The accountant argues that the basis changed on midnight of the day he died.  Therefore my father's estate = the tax return filed under his social for last year, has to pay no capital gains.  I argue that I and the other beneficiaries don't have to pay capital gains because the basis for us is the basis on that midnight, but his social has to pay capital gains tax as part of the return for last year.  What is the law?  

 

The second part of my question is:  shouldn't his income tax return have been filed under a federal ID for the estate?  Exactly how does the transition between a personal income tax (1040) and an estate income tax (1041) work (and when)?

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Level 18

Does a decedent have to pay capital gains on federal tax return?


@aninkling wrote:

 (1) File a 1041 for 2018 (it will be late, as this is in May) with the capital gains reported via the 1099B with his social on it and we also report the distribution made in 2018.  But this is not the final distribution.  We file a final 1041 for 2019 with the transactions for 2019 and close the estate. 

 

(2) We not file a 1041 at all for 2018 but file a final 1041 for 2019 and include the capital gains under his social 1099B reported in 2018, as well as all income, etc and distributions.  


 

Do not file a 1041 under your father's social security number. The estate needs its own federal tax ID number (EIN) for which you can apply for online.

 

See https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

 

 

If you file a 1041 for the 2018 calendar year, then the return is indeed late at this point. However, you can choose a fiscal year for the estate when you file the initial return for the estate. In that event, the estate's tax year could begin on 11/22/2018 and end on the last day of any month as far out as 10/31/2019. 

 

You might want to consider consulting with a tax professional to deal with this, and other, issues going forward.

8 Replies
Level 18

Does a decedent have to pay capital gains on federal tax return?

I am sorry for your loss.

 

This is straight out of the book, but the final individual income tax return of a decedent is prepared and filed in the same manner as when they were alive. All income up to the date of death must be reported and all credits and deductions to which the decedent is entitled may be claimed. 

 

Publication 559 provides a decent overview of how to handle filing the final individual income tax return for the decedent as well as the income tax return for the estate (if required). 

 

See https://www.irs.gov/publications/p559#en_US_2018_publink100099499

 

 

With respect to your father, his final individual tax return (e.g, Form 1040) would be filed under his social security number and he would not pay capital gains tax on the stock he continued to hold through the date of his date (the final return would, however, include stock he had actually sold during the tax year prior to his death).

 

The basis of the stock he held on the date of his death is stepped up to its fair market value on the date of his death, so that would be the basis of the stock in your hands per Internal Revenue Code Section 1014(a).

 

Your father's estate would be required to file an income tax return (under the estate's federal tax ID number) if it received gross income for the tax year of $600 or more.

 

See https://www.irs.gov/instructions/i1041#idm140630132235568

Level 6

Does a decedent have to pay capital gains on federal tax return?

I'm still missing something and the IRS documentation doesn't clear this up.  I guess something is just going over my head.  So... He died on Thanksgiving.  His financial stuff was sold the following Monday, the first day of business after his death.  He got a nice capital gains according to the end of year 1099-B summary reported on his social security number.  And at this point I guess I should say "his estate got..."  The result was distributed to the beneficiaries.   We still had his house to sell, which was sold this year.  There were other incomes this year, 2019, as well.  So, are the capital gains from the financial stuff ignored by all?  Should a 1041 be filed for the estate with the estate ID for the 2018 year declaring those capital gains?  This wouldn't be the final 1041 because there is income this year, 2019, from the estate plus the income on the sale of the house (no profit or loss for that).   There has been no distribution reported anywhere yet, and I know that the distributions should be reported some time as a result of the 1041 process.  Is that reported only on the final (2019) 1041 filing, or is the distribution made in 2018 reported on a 1041 that was not filed in 2018?

Level 18

Does a decedent have to pay capital gains on federal tax return?


@aninkling wrote:

So, are the capital gains from the financial stuff ignored by all?  Should a 1041 be filed for the estate with the estate ID for the 2018 year declaring those capital gains?  


The capital gains are not "ignored by all" but will be reported on the income tax return for the estate, when it is filed. Since the stock transactions transpired after your father's death but appeared on a 1099-B with his social security number, he received any net gains as a nominee (i.e., the proceeds were treated as belonging to him when they actually belonged to his estate). 

 

In sum, the post-death capital gains need to be reported on the estate's income tax return.

Level 18

Does a decedent have to pay capital gains on federal tax return?


@aninkling wrote:

Is that reported only on the final (2019) 1041 filing, or is the distribution made in 2018 reported on a 1041 that was not filed in 2018?

The distribution will be reported on the K-1(s) that will be generated when the 1041 is prepared for the initial tax year of the estate. 

 

Note that the initial tax year of the estate can be a fiscal year (e.g., starting on the date of death and ending 12 months or less thereafter).

 

See https://www.irs.gov/instructions/i1041#idm140630132004832

 

Therefore, the initial income tax return (1041) for your father's estate could, for example, begin on November 22, 2018 and end on October 31, 2019. Any distributions made during that period would be reported on the beneficiaries' 2019 individual income tax returns.

Level 6

Does a decedent have to pay capital gains on federal tax return?

So I accept the solution that the accountant should not have reported the sale value of the financial stuff on my father's 1040 for 2018  (The 1040 showed a capital gains of 0 because the accountant reported the stepped up valuation for both the sold value and the basis.  That 1040 should be amended to report no capital gains entry at all.)

 

I believe you are saying we have two options after filing an amended 1040 for his social. 

 

 (1) File a 1041 for 2018 (it will be late, as this is in May) with the capital gains reported via the 1099B with his social on it and we also report the distribution made in 2018.  But this is not the final distribution.  We file a final 1041 for 2019 with the transactions for 2019 and close the estate. 

 

(2) We not file a 1041 at all for 2018 but file a final 1041 for 2019 and include the capital gains under his social 1099B reported in 2018, as well as all income, etc and distributions.  

Level 18

Does a decedent have to pay capital gains on federal tax return?


@aninkling wrote:

That 1040 should be amended to report no capital gains entry at all.


Technically, the 1040 should show the capital gains as having been received as nominee for the estate. The 1040 shows the gain and then a reversing entry is made to show the gains actually belonged to the estate. You indicated the 1040 prepared by the accountant showed capital gains of zero, so make sure the accountant did not prepare the return as stated above before you consider amending (i.e., the accountant could have prepared the 1040 properly).

 

 

 

 

Level 18

Does a decedent have to pay capital gains on federal tax return?


@aninkling wrote:

 (1) File a 1041 for 2018 (it will be late, as this is in May) with the capital gains reported via the 1099B with his social on it and we also report the distribution made in 2018.  But this is not the final distribution.  We file a final 1041 for 2019 with the transactions for 2019 and close the estate. 

 

(2) We not file a 1041 at all for 2018 but file a final 1041 for 2019 and include the capital gains under his social 1099B reported in 2018, as well as all income, etc and distributions.  


 

Do not file a 1041 under your father's social security number. The estate needs its own federal tax ID number (EIN) for which you can apply for online.

 

See https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

 

 

If you file a 1041 for the 2018 calendar year, then the return is indeed late at this point. However, you can choose a fiscal year for the estate when you file the initial return for the estate. In that event, the estate's tax year could begin on 11/22/2018 and end on the last day of any month as far out as 10/31/2019. 

 

You might want to consider consulting with a tax professional to deal with this, and other, issues going forward.

Level 14

Does a decedent have to pay capital gains on federal tax return?

very well written and "spot on" advice

 

Personally, I would expect the accountant to fix the errors at no charge to you.