NT / Do People Just Believe What They Want To?

[RitaB]

Last year, I gained a client who had been getting "love letters" from IRS asking for taxes on $38,000 of savings bond interest. He inherited the bonds from father in 2005, cashed them all cause "everyone" told him inheritances weren't taxable. Even the accountant that did his 2005 return ignored the 1099-INT. I mean, there it was, stapled to his other stuff, bigger than howdy, and the interest completely absent from the return.

I spent an incredible amount of time printing articles in layman's terms, plus stuff from IRS about income in respect of decendents, convincing him that inheriting the bonds was not a taxable event, but cashing them sure was! He finally saw the light, coughed up the tax he owed, and I was happy to have contributed to his education.

This year, he sold the house that his father left him that he had been using as a rental. 'Where's the settlement statement?" I ask.

His response: "I thought I didn't have to report that cause it was inherited."

Arghhhh!

[jasdlm]

Next year it's the IRA!

[Julie]

Yes, they believe exactly what they want to believe. (Ever argue with anyone about religion? Don't. No matter which side you're on.)

And they hear exactly what they want to hear. So they will swear you told them that whatever it was is not taxable....even if you told them the exact opposite, or never even knew about their situation.

[RitaB]

I spent an incredible amount of time printing articles in layman's terms, plus stuff from IRS about income in respect of decendents

It probably would have been good if I had spent some time learning to spell decedent...

But yes, I thought I would just smack him when he said that. He just wants it to not be taxable, so he has some kind of block there, or something. People are like that, aren't they?

[JohnH]

Well who is he supposed to believe, you or his barber?

Cut the client a little slack.

After all, everybody knows barbers give much better tax advice than we do, and it's easier to accept!

[joanmcq]

Dunno, is TN real estate as bad as some of the rest of the country? He could have a loss! So what was value at DOD? Has he been reporting the rental income?

[kcjenkins]

Sounds to me like he is getting his tax advice from Betty Sue and Jerome. They are from your part of the country, you know.

Of course, you contributed to it. After all, you told him that "inheriting the bonds was not taxable..." and he inherited the house, right? See, you confused the poor guy! Sometimes we just can not win. If you give him the full lecture, he stops listening after the second minute anyway. And he'll only 'remember' the parts he likes.

[RitaB]

Dunno, is TN real estate as bad as some of the rest of the country? He could have a loss! So what was value at DOD? Has he been reporting the rental income?

The house was in FL and an appraisel was done on the DOD. Yes, he reported the rental income, and depreciated the house using FMV on the DOD, and yes, there was a gain on Form 4797. Sorry I didn't elaborate on all that.

If he had a loss, he would have been eager to report THAT, which was my point. He wanted to have it his way, like at Burger King.

[RitaB]

Sounds to me like he is getting his tax advice from Betty Sue and Jerome. They are from your part of the country, you know.

Of course, you contributed to it. After all, you told him that "inheriting the bonds was not taxable..." and he inherited the house, right? See, you confused the poor guy! Sometimes we just can not win. If you give him the full lecture, he stops listening after the second minute anyway. And he'll only 'remember' the parts he likes.

Yep, that's what I realize now! I was a lot less helpful in my explanation this time. It took about 15 seconds this time! Geez! It's kinda like explaining to some clients why they can't itemize - after a while you just take their papers, complete the Sch A with $3000 on the bottom line, and move on!

[michaelmars]

lets see, part of the bond interest should have been accrued on the 706 so that part could be excluded on his personal return. he shuld only pay tax on the interest accrued since dod so 1/2 right 1/2 wrong

[RitaB]

lets see, part of the bond interest should have been accrued on the 706 so that part could be excluded on his personal return. he shuld only pay tax on the interest accrued since dod so 1/2 right 1/2 wrong

Yeh, they could have put the accrued interest thru DOD on dad's final, but they didn't. (There was no 706. It's not required for everyone.) Same amount of tax whether son or father reported it. I did think of that, and should have elaborated on that as well, I suppose. I forgot for a moment that us accountants really love to find errors with what other accountants do.

[michaelmars]

BUT THE step up in basis includes the accrued interest even if no 7060 is needed thus i wuld not take that interest on the sons return. i have never had that questioned on a return here but granted i also usually prepare the 706 even if non-taxable just for this type of situation.

[RitaB]

BUT THE step up in basis includes the accrued interest even if no 7060 is needed thus i wuld not take that interest on the sons return. i have never had that questioned on a return here but granted i also usually prepare the 706 even if non-taxable just for this type of situation.

Did you catch the part where I was not the original preparer? All of this happened in FL, and I mistakenly reported to you all that the son had the interest income in 2005; it was actually 2004. (You know how time flies whether you're having fun or not.) He came to me for help in March 2007. Would you still handle it with the 706? Would that option be available?

Also, you would have to take some of the interest on the son's return, I believe, unless he cashed the bonds on the DOD, which he did not.

I appreciate the opportunity to learn something here, even though my original post was titled "NT..."

Thank you for your help.

[michaelmars]

you sound defensive to me and i certainly hope i didn't offend you or imply You made a mistake. i am just saying that i believe the correct handling of this is that the son should only pay the interest accrued during the time he held the bonds, you could be a hero and amend the prior returns if you agree with me.

just to be sure i am getting a hair cut later and will double check with my barber.

[RitaB]

you sound defensive to me and i certainly hope i didn't offend you or imply You made a mistake. i am just saying that i believe the correct handling of this is that the son should only pay the interest accrued during the time he held the bonds, you could be a hero and amend the prior returns if you agree with me.

just to be sure i am getting a hair cut later and will double check with my barber.

No problem. We'll see what the barber recommends. Haha!

[joanmcq]

Of course, then you get the nastygram from the IRS if you don't report all the interest. Per the Tax Book, you have to elect to report the accrued interest on the decedent's final 1040, or else it is taxed to the estate or other final recipient. So if whoever prepared the father's final return did not elect to report the accrued interest, then client has to. the only out is if the bonds were so old they had stopped accruing interest. At that point the father should have reported the interest regardless of whether he sold them. If this is not the case, sonny is outa luck and outa a lot of interest and penalties.

[RitaB]

Per the Tax Book, you have to elect to report the accrued interest on the decedent's final 1040, or else it is taxed to the estate or other final recipient.

Thank you for this post! The phrase "taxed to the estate" is really jumping out at me. My guy's dad's estate was maybe worth $350,000, so it never occured to me to even consider filing a form designed for estates over $2 million. It does not make sense to me that just putting it on the 706, and it not being taxed at all, exempts sonny boy from paying the tax.

At any rate, the 706 (or the request for extension) had to be done by 9 months after DOD. Dad died in 2004, sonny cashed bonds in 2004, FL accountant did both returns. I just met the son in March 2007, (when he brought in those nastygrams!), so I guess I didn't totally drop the ball, afterall; it was not an option for me to prepare a Form 706 anyway.

Time to hit the sack. Hope you have a productive and profitable day tomorrow!

[Gail in Virginia]

I must be missing something here, but I would have thought that if the estate were going to pay the tax on the interest earned by the bonds, it would go on a 1041, not a 706.

[RitaB]

I must be missing something here, but I would have thought that if the estate were going to pay the tax on the interest earned by the bonds, it would go on a 1041, not a 706.

You are correct. And that is the point - if it's reported on Form 706 (for estates under $2 million), nobody pays the tax, and I don't believe that is a correct use for the form. Another poster (see #10 and #12 above) indicated that his company would have filed (the not required) 706 in order to report the savings bond interest and effectively remove the tax liability for the interest reported (but not taxed) on the 706. I do not believe that is correct, and I posted a link under the "Michaelmars" thread which supports my opinion. I don't doubt that it's being done effectively, I just think maybe something's going under the IRS radar. Not to be critical, but I would have to do a lot more study to be convinced that this routine filing of 706 to avoid the tax on savings bond interest is proper.

[michaelmars]

its not any different than taking a step on a house even when there is no 706 or when the 706 is non taxable is it? or on marketable securities? no rule says that the estate has to be taxable for the beneficiary to get a step up, nor is there a rule that a 706 have to be filed. i just file one to start the statute of limititations for the irs to question the valuations

[RitaB]

its not any different than taking a step on a house even when there is no 706 or when the 706 is non taxable is it? or on marketable securities? no rule says that the estate has to be taxable for the beneficiary to get a step up, nor is there a rule that a 706 have to be filed. i just file one to start the statute of limititations for the irs to question the valuations

Hi, Michael - Actually, income in respect of a decedent (like the savings bond interest we've been talking about) is completely different than capital assets like homes and marketable securities. IRD does not receive a step up basis at DOD like captial assets. See Publication 559. Also, if you just google "income in respect of a decedent" I think you'll find a lot of articles that explain it better than IRS (imagine that! haha). Believe me, last year I read up like crazy on this.

Note the tip at the top of p. 9 of Pub 559 as well:

"If you have to include income in respect of a decedent in your gross income, and an estate tax return was filed, you may be able to claim a deduction for the estate tax paid on that income." (Emphasis mine.)

So, I don't believe your clients are supposed to be relieved of that tax if estate tax was not paid.

Also, as someone else alluded to, if the income would be taxable on the decedent's final 1040, or Form 1041, I don't think IRS just wants you to pick another form so it won't be taxable. I don't know, I don't always understand IRS... ;-)

[BulldogTom]

Is the difference because the interest on the bonds is IRD? I have been watching this thread develope and I think that is the problem with the bonds. A home or marketable secuitites are not IRD. Step those up.

Just a thought from an unresearched point of view.

Tom

Lodi, CA

[RitaB]

Is the difference because the interest on the bonds is IRD? I have been watching this thread develope and I think that is the problem with the bonds. A home or marketable secuitites are not IRD. Step those up.

Just a thought from an unresearched point of view.

Tom

Lodi, CA

Yep, that's what I think, too! I was editing while you were posting. Thank you, Tom, for your input.

[michaelmars]

I'm now on shaky ground and gonna look at this issue after 4/15 [unless i get an applicable returns before them]

[RitaB]

I'm now on shaky ground and gonna look at this issue after 4/15 [unless i get an applicable returns before them]

Don't feel all alone. If I had a nickle for every time I've been on shaky ground...

I hope you find that you've not done many with savings bond interest. That is probably the case. Hey, I've done taxes for 14 years and last year was the first time I've seen someone who cash a truckload of savings bonds they inherited. It's always been little amounts, here and there, no biggie, in the past. On the other hand, maybe I've lived a sheltered life!

Here is one good article: http://www.leismaninsurance.com/2004%20Apr...%20article.html

Excerpt:

Avoid surprises

Unlike most assets included in an estate that receive a step-up in basis — such as stock with a low income tax basis or a personal residence — IRD assets don’t receive a new basis at death. So they are subject to both income and estate tax. This double tax burden can surprise beneficiaries who were unaware that they owed income tax on these assets.