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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
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Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Is there a downside using Form 8855 to treat a ...

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Is there a downside using Form 8855 to treat a Qualified Revocable Trust as part of an Estate? In this case, the decedent's assets went directly to a Survivors Trust and there is no Estate tax return required (less than $2 million assets). However, there is an unused $7,000 capital loss stuck in the decedent's final tax return for 2006. IRS said to us Form 8855 to transfer the loss carryover to the Trust. Would this make Trust assets taxable?
Submitted: 7 years ago.
Category: Tax
Expert:  Christopher Phelps replied 7 years ago.

Capital loss carryovers of the decedent terminate on the date of death. They may not be used by the decedents estate or any trust in existence after the date of death. Any capital losses incurred by the estate on any deductions in excess of the estate's income on its final return may be apportioned to the estate beneficiaries and used by them on their individual returns.

If there is a surviving spouse then he/she may continue to use their share (i.e. 50%) of the joint capital loss carryovers.

Form 8855 is used to make an election to treat a decedent's estate and a trust as one entity for income tax purposes for taxable activity incurred AFTER the decedents date of death. It cannot be used as a means to transfer capital loss carryovers to another taxable entity. Sorry, but thats how the tax law works currently.

I do recommend you engage a CPA or tax attorney to review the decedents estate to make sure an estate income tax return is not required.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Customer: replied 7 years ago.
Reply to Christopher Phelps's Post: Hi Christopher:

Thanks for the answer. I need some clarification on this answer. Do I reply here or through Just Answer??



The IRS told me that Form 8855 would transfer the capital loss carryover to his Estate, but in this case no Estate Tax return is required (spouse died in 1998) and assets less than $2 million in 2006. All assets transferred directly to Survivors Trust and bypassed the estate.



Any reference you can give me for the capital loss that is locked into the decedent’s final tax return?



Jill
Expert:  Christopher Phelps replied 7 years ago.

It will not be the first time the IRS gave an incorrect answer.

The key IRS guidence on this is Revenue Ruling 74-175 at http://www.taxlinks.com/rulings/1974/revrul74-175.htm.

It is well-settled law that capital loss carryforwards expire on the death of a decedent.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Christopher Phelps
Christopher Phelps
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CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member