Tax advisors are involved in all aspects of their clients' personal and financial lives, and when a taxpayer dies, they can be one of the most valuable family counselors. Although the largest inheritance tax exemption in recent years has kept the number of taxable properties to a minimum, there are still many tax issues to be addressed when a taxpayer dies. One of those issues is the carryover that the taxpayer or the spouse might have upon his/her death.
What happens to these carryovers? Whether they are passive losses, net operating losses, charitable donations, or several other deductions or credits that haven’t been used in previous years? How can the one be assured that the correct values are used in the deceased's final tax return? And are there any preparation openings that could benefit the surviving spouse's tax position?
Carryovers can usually be used in the deceased's final income tax return, but are lost later. For a single taxpayer, it's quite simple. It is more complicated when the deceased is married and submits a joint declaration. When the surviving spouse submits a joint return with the deceased for the year of death, the full amount of the balance can be used in the year of death, even if used to offset the surviving spouse's income generated after death. However, after the year of death, the remainder should be carefully considered to determine what remaining values, if any, belonged to the deceased, as the values attributable to the deceased have been lost and cannot be passed on to the surviving spouse.
For a couple who have been filing joint returns for several years, there may be different carryover types in the year of one of the spouses' death. Each carryover should be given to each spouse. Here is a summary of important carryovers upon a taxpayer's death and how each transfer should be attributed to the deceased and the surviving spouse.
Capital Loss Carryovers: Carryovers of capital loss are also deductible only by the taxpayer who suffered the loss. Therefore, every year, any sale of fixed assets should be tracked to determine which spouse caused the capital loss. If a couple sells securities, assets, or other fixed assets held at a loss and the loss is not fully utilized in the years preceding the death of either spouse, half of the loss is attributed to the surviving spouse and is transferable. Suppose only one of the spouses owned the property that generated the capital loss transfer. In that case, any transfer is attributed only to the spouse who owned the property and suffered the loss, and this transfer is lost if it is not absorbed in the joint restitution request for the year of death.
Charitable Contributions Carryover: Charitable contributions
carryover expires if a contributor does not use them before their death. To determine the amount of the transfer attributable to the surviving spouse, the couple's initial contributions must be recalculated as if they had made separate contributions for the contribution year. The part of the role assigned to the surviving spouse is the amount in the same proportion of the total carryover as the carryover of the separated spouse and the two spouses' total contributions separately. Any residue attributed to the deceased spouse will be forfeited if not used in the year of death.
NOL Carryover: NOL Carryovers are deductible only by the taxpayer and cannot be transferred or used by another taxpayer, including the surviving spouse. NOLs can usually be attributed to specific business interests, so unless both spouses suffer losses, a CPA should be able to assign the transfer to the spouse who caused the loss. For individual ownership, NOL is assigned to the spouse, who is the business's sole owner. For family businesses operating as separate entities or as an S corps or partnership where losses are passed on to the business owners, any NOLs in the couple's joint tax return can be attributed to each spouse depending on the company's ownership. Any deceased NOL amount that is not used in the year of death will be forfeited.
Passive Activity Loss Carryovers: PALs must be followed up to the business owner. According to section 469 (g) (2) (b), any remaining PAL of the deceased is allowed in the final joint repayment for the year of death, as the property is considered to be alienated. However, the amount of the transfer that can be deducted should be reduced by the excess of the property base held by the assignee (heir) over the correct base of the deceased in the property immediately before death. In other words, the amount of the loss equal to the basic increase at the time of death is not granted to the deceased or anyone else, as the heirs receive this tax benefit from the increase. If the PAL carryover of the deceased is less than the base increase, no carryover in the final declaration will be allowed.
Other Carryovers: Other carryovers, such as foreign tax credits, investment interest expenditure, and carryover of the alternative minimum tax credit (AMT), must also be distributed between the deceased and the surviving spouse, depending on the spouse who generated the tax credit. Any trace attributed to the deceased is permanently lost after the year of the deceased's death.
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