JOHN BULLIS: Changes to tax basis for inherited assets

The "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" has special provisions on the tax basis of inherited assets.

"Tax basis" is the amount you can sell an item for with no taxable gain. It's like the amount you paid for real estate, stocks, bonds or personal property. (IRAs, life insurance and annuities have different rules.)

The 2010 Act provides (for 2011 and 2012) the $5 million exclusion from death tax, but it also provides the tax basis is the fair market value at the date of death.

That is much better than the 2010 rules that said you could "step up" the tax basis of inherited assets only for $1.3 million for non-spouses and $3 million for surviving spouses. The rest of the assets were not to be valued at fair market value for tax basis in the hands of the inheriting beneficiary. For the rest of the assets, you were supposed to use the original cost of the person who died.

Now the 2010 Act gives a different rule for deaths in 2010. You can use the date of death value (fair market value) as tax basis and have up to $5 million exempt from death tax.

Or, your executor can elect to apply the previous tax rules of no death tax for 2010 deaths (no matter how much was left behind) but the heirs get the old carryover basis (subject to the $1.3 million and $3 million allowances).

Congress sort of made the rules for 2011 retroactively apply for 2010.

However, unless Congress acts again before 2013, the death tax exclusion goes back to only $1 million exclusion with a tax rate of 55 percent on the excess.

Maybe the long-awaited tax reform will happen soon. Our tax laws are a mess! Our existing tax laws are too complicated, too expensive to administer and a barrier to increasing productivity. I hope Congress does not only try to truly simplify the income tax rules but also give us long-term, simplified estate and gift tax rules.

It's time for all of us to contact the folks in Congress and let them know it's time to get the tax laws and rules under control by simplifying them and eliminating uncertainty, now.

Did you hear "Knowledge is knowing a tomato is a fruit; Wisdom is not putting it in a fruit salad..."?

• John Bullis is a certified public accountant, personal financial specialist and certified senior advisor serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.


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