Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 21, 1993 TAG: 9302210055
SECTION: BUSINESS PAGE: A-6 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
HEIRS NEED ANSWERS FROM ESTATE ATTORNEY
EDITOR'S NOTE: The Roanoke chapter of the Virginia Society of Certified Public Accountants will answer tax-related questions from our readers in a special feature on the Monday Money Page. Send them in writing to Tax Questions, in care of Mag Poff, Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010.Q: My father passed away in 1991 in West Virginia without a will. He left a wife and a large family of adult children with an estate over $600,000.
We sold one piece of property and divided the money. Our attorney said he filed the estate tax and it has been cleared by the IRS.
Do I have to file and pay taxes on this income? Some family members say their tax preparers said we have to file it but we do not have to pay taxes on it. Please help me to do what is correct.
A: If the decedent died without a will, the real property passes according to the terms of the title and/or state law. The property is valued for estate and income tax purposes at its fair market value at the date of death. The heir's basis, or cost, is also the value of the property at the date of death.
When the property is sold, the persons to whom the title passed are responsible for reporting the sale and determining the gain or loss that is to be recognized on their individual income tax returns.
If the property sold for more than its value at the date of death, then a gain will result. Likewise, if it was sold for less than its value at the date of death, a loss will be incurred. The loss would be deductible unless the sale was between related parties.
The heirs should contact the estate attorney to determine the correct basis and the correct distribution among the heirs.
Answered by Gary Duerk of Brown, Edwards & Co.
Q: I filed a 1991 state tax return for Virginia in March 1992. I had cashed in several E and HH bonds I had inherited. I had claimed the interest from the bonds on the federal form. I also had claimed the interest on the state tax form. At that time, I did not know they were exempt from state tax. I filed an amended return for the state and was reimbursed for the overpayment.
I received a form for "Certain Government Payments Including Interest Income" from the state. It says "Income Tax Refunds" for the amount I was reimbursed. I actually owed money for 1991, even after the amendment. How is the IRS going to know that I did not get a refund but a reimbursement for overpayment? Isn't this going to set off a red flag? Is there a way to complete the federal and state forms so I do not pay additional tax on this interest?
A: A refund and a reimbursement under most circumstances are the same. If you received a refund, credit or offset of state income taxes in 1992 that you paid and deducted before 1992, you may have to report part or all of this amount as income if your itemized deduction for state taxes in the year you paid the taxes resulted in a tax benefit.
Do not report the refund as income if, in the year the tax was paid, you did not itemize deductions on Schedule A (Form 1040) or if you filed Form 1040A or Form 1040EZ. In other words, if you did not take a deduction for the taxes on Schedule A in the year that they were paid, you do not have to report it as income in the year that you receive a refund of these previously paid taxes.
If the state income taxes were paid in 1991 and deducted as an itemized deduction in 1991, and you received a refund, credit or offset of a portion of these taxes in 1992, you must report it in 1992 as income because you previously received a tax benefit by deducting the taxes paid on your 1991 tax return.
If your itemized deductions for 1991 were limited because your adjusted gross income was more than $100,000 ($50,000 if married filing separately), you must use the worksheets on pages 18 and 29, IRS Publication 525, to figure the amount of the 1992 refund to include as taxable income in 1992.
If the refund, reduction or credit and the deductible expense occur in the same year, the refund reduces the deduction and is not reported as income.
In the case of U.S. Savings Bonds, the interest income must be reported on Schedule B (Form 1040) since interest from obligations of the United States is generally subject to federal income taxes. However, the interest is not subject to Virginia income taxes and should be listed as a subtraction from federal adjusted gross income on page 2, line 38 of Virginia Form 760.
Since line 6 of Virginia Form 760 starts with your federal adjusted gross income, which includes the series E and HH interest, by listing this interest on line 38, the interest will be subtracted in arriving at your Virginia taxable income.
Answered by Patrick Budd of Budd, Ammen & Co.
Q: What do you have to claim on state and federal taxes on lottery winnings? I got a form when I hit $2,600 in one fell swoop and was told to report it. But how about smaller winnings? Do you total all of them and pay on it? Or do you pay only on amounts over a certain dollar figure?
A: Leave it to the IRS to take the fun out of playing the lottery. Unfortunately, all winnings from lotteries and other forms of gambling are income reportable on line 22, "other income," on your federal Form 1040.
You can, however, deduct gambling losses up to the amount of your winnings if you itemize deductions on Schedule A of Form 1040. The losses fall under "miscellaneous itemized deductions," which are subject to a 2 percent floor. Make sure you hold on to those losing tickets to substantiate your losses.
Virginia, on the other hand, gives you more of a break. On your Virginia tax return you may subtract from income each individual prize that is less than $600, so you will only pay state taxes (in Virginia) on any individual prize of $600 or more.
Answered by Martha K. Gilmore of McLeod & Co.