When someone passes away, there are three separate taxes to consider: property taxes, income taxes and inheritance taxes. Here is some general information concerning these taxes, however, I am not a C.P.A. or a tax professional. For further information or tax advice, please see a qualified tax professional.
As most California property owners know, any increase in our property taxes from year to year is relatively small thanks to Proposition 13. The benefits of Proposition 13 can be lost, however, if there is a “change of ownership” within the definition of the State rules. Unfortunately, recently passed Proposition 19 greatly curtailed the ability to transfer property and avoid reassessment in the most common scenario – transfers between parents and children. Under the new rules the only reassessment exemption for parent-child transfers is where the parent’s principal residence is transferred to a child who will use the property as his or her principal residence.
When someone passes away and his or her assets continue to earn income during the time the estate is being administered, income taxes may be imposed on the estate. After death, a person’s social security number can no longer be used and income from his or her estate is reported under a new tax identification number obtained from the IRS. There are normally two returns due the year after a person dies. The first return is the deceased person’s personal return and covers the period from January 1st to the date of death. The second return, called a “fiduciary return”, will cover the period from the date of death through December 31st. An estate is a taxable entity separate from the deceased person and it exists until the final distribution of estate assets is completed. While it exists, tax returns must be filed for the estate. If the income for the year has been distributed to beneficiaries, the income is reportable by each beneficiary on his or her individual income tax return. If the income has been retained in the estate, the tax on the income is payable by the estate.
The third type of tax that may be imposed on a deceased person’s estate is called the federal estate tax, or inheritance tax. The tax is assessed according to the tax rate in effect the year a person dies. In 2001 estate taxes were imposed on estates greater than $1,000,000. This amount gradually rose over the next decade so that in 2009 taxes were imposed only on estates over $3.5 million. Due to the expiration of a Bush-era law, there was no inheritance tax in 2010. Thanks to former President Trump, the exemption amount is now $11.7 million per person. It is currently set to drop back to $5 million per person with inflation adjustments in 2026. Of course, with all the money being spent and lost during the pandemic, the government could choose to set the limit even lower at an earlier time.
Here is the trouble part. When property taxes remain unpaid, eventually the County will get around to selling the property in order to collect the tax. When either income or estate taxes are not paid, or paid late, penalties are extremely high, and the taxing authorities can go after either the decedent’s estate or any beneficiary who received his or her money before taxes were paid.
© 2021 by Marlene S. Cooper. All rights reserved.
(You may obtain further information at the website www.marlenecooperlaw.com, by e-mail at MarleneCooperLaw@gmail.com, by phone at (626) 791-7530 or toll free at (866) 702-7600. The information in this article is of a general nature and not intended as legal advice. Seek the advice of an attorney before acting or relying upon any information in this article).