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Jonathan Tierney
Jonathan Tierney, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 322
Experience:  Tax Accountant at Praxair, Inc.
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I have just received a K-1 (1041) of family trust.

Customer Question

I have just received a K-1 (1041) for proceeds of family trust. Accountants chose to let recipients pay the capital gains. Not sure why there are cap. gains on an estate well under a million dollars and why am I ending up also paying capital gains to State of Maine when the estate originated in VA.?
Norton West Quickbooks Accountant Online edition. This is for my 2014 return. Norton West
Submitted: 1 year ago.
Category: Tax
Expert:  Jonathan Tierney replied 1 year ago.

Hi, my name is ***** ***** my goal here to provide you with the most complete and accurate answer possible.

When there is a sale of tangible property such as real estate, the state where the property is located is allowed to tax any gain on that sale. This would be the most likely reason that there would capital gains allocated to a nonresident estate. You should have received a Maine K-1 if there is any gain allocated to Maine.

You are correct that an estate generally would not have a lot of capital gains as all assets in the estate have their basis adjusted to fair market value upon the decedent's death. Nevertheless, if the estate sold assets and made distributions of the proceeds the estate is allowed to pass along the capital gains to the beneficiaries.. This is most likely in the beneficiaries' best interest because estates are subject to higher rates of capital gains tax and the net investment income tax that when their income is much lower than individuals. This would mean a smaller distribution for the beneficiary as the estate would have more taxes to pay, and probably at higher rates than you would have to pay. For example, in 2015 a single individual would have to have taxable income of $406,7500 to be taxed at the 20% long-term capital gains rate, while an estate would have to pay the 20% rate if its taxable income is above $12,150.

However, the only way to know for sure why there is capital gain in Maine (and any capital gain at all), is to ask the executor who has a fiduciary responsibility to the beneficiaries.

I hope this answers your question, and please let me know if I can clarify anything or answer any additional questions. Thanks, Jonathan

Customer: replied 1 year ago.
It was a trust in Va. The sale was only investments, no real estate. My proceeds was about 150,000. Gap gains showing on K-1 1041. Executor estimated my cap. Gains would be approx. $ 9000. When I entered this data into Turbotax. I am a Maine resident ( Now single status. ). Turbotax shows about $ 5700 fed. And $ 3400 due to Maine. It appears the total Fed is adjusted down by the Maine amt. so the total seems in sync with what I was told.
Customer: replied 1 year ago.
Guess I am confused between the threshold estate tax that should not apply, and the capital gains tax on the trust disbursement.
Second, why does Maine get to charge capital gains tax on an trust that is in Virginia and only investment stock and bond sales?
Expert:  Jonathan Tierney replied 1 year ago.

Okay, investment income on intangible assets like stocks and bonds are always taxable in an individual's state of residence (if the state chooses to tax that income). That the trust is in Virginia does not matter because if it is passed through to you, it is now your income and Maine can tax it because you are a resident.

Estates are subject to two types of taxes. There is an income tax which taxes any earnings of the estate like interest, dividends, and capital gains. An estate or trust must file a tax return if its gross income is above $600. The purpose of this income tax on the trust is to tax the income of the deceased person, which would otherwise a tax-free entity like a non-profit if there was no income tax in estates and trust. The form they file is Form 1041, which issues a K-1 to its beneficiaries if the income is being passed through to them. The reason for this is because the government considers the income to really be the beneficiaries, as an estate is just a stand-in entity for a deceased person, and the beneficiaries are ultimately supposed to have the income distributed to them..

There is also a wealth transfer tax on estates with a net taxable estate plus lifetime gifts greater than $5,430,000 in 2015. This tax is not based upon income but rather a tax on the right to transfer property to one's heirs, either through gifts or at death through an estate. The estate you mentioned would be exempt from the wealth transfer tax, but not the income tax. The wealth transfer tax on an estate is reported on Form 706.

I hope this makes sense, let me know if I can clarify anything further. Jonathan

Customer: replied 1 year ago.
Thank you. I just wanted to make sure I wasn't paying capital gains to Maine unnecessarily. I believe you have clarified that. Thanks so much for the help. Norton West
Expert:  Jonathan Tierney replied 1 year ago.

I was wondering if you might need help with anything else because the question is still.

I am more than happy to answer any other questions you might have. Thanks, Jonathan