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My father died in July 08. I am the executor and probate has

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My father died in July...
My father died in July 08. I am the executor and probate has been completed. His estate only consists of 50K in 2 IRA's and Stock valued at around 90K. I have filed his 1040 for 2008. My question is two fold. My father has a house in Mexico with 2 dogs that require care and maintenance...I paid to have probate done in MX according to MX laws...I am going to be dividing his investments 50/50 minus bills that his estate has incurred. I then realize that my sister and I will be subject to personal taxes on our inheritance. My questions are: 1. How do I bill the estate to get reimbursed for my personal expenses and items I paid personally because I didn't have access to any of dad's money without getting taxed on the reimbursment? I know that I need to file a final estate tax in 2009...how do I also keep 10K or so set aside for me to use going forward regarding costs associated with the MX house with out personally having to pay taxes on it?
Submitted: 8 years ago.Category: Tax
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6/1/2009
Tax Professional: Lev, Tax Advisor replied 8 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,130
Experience: Taxes, Immigration, Labor Relations
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Estate taxes might be due only if the total value of the estate is above $2,000,000 (for 2008)

 

The estate would need to file an estate income tax return - form 1041 - http://www.irs.gov/pub/irs-pdf/f1041.pdf

The distribution from the estate is reported to each beneficiary on the schedule K-1 - http://www.irs.gov/pub/irs-pdf/f1041sk1.pdf

 

If the house or any other properties would be sold by the estate - that is estate income and reported on the estate income tax return.

If the house is distributed by the estate to beneficiaries and sold thereafter - the sale transaction would be reported directly on beneficiaries' tax returns.

 

The capital gain of the sale of the house is calculated as (selling price) - (basis)

The basis of the inherited property is determined as a fair market value of the property on the day your father died (stepped up basis) - so regardless if the house is sold by the estate or by beneficiaries - there likely would not be any capital gain.

 

The estate may pay you back any expenses to handle estate - such as bills, dogs expenses, etc, however - such expenses are not deductible for the estate income tax purposes.

Some expenses are deductible on the estate income tax return - form 1041 - for instance - real estate taxes, mortgage interest, etc.

 

Distribution from IRA accounts is generally taxable only if you take a distribution.

To avoid pushing you into higher income tax bracket - you need to plan such distribution wisely.

 

Generally - you have a choice - if the estate has any taxable income - either estate itself will pay income tax on that income and distribute it tax-free to beneficiaries - or beneficiaries will be responsible for tax based on the schedule K-1. In most situations beneficiaries' tax liability will be less.

 

Let me know if you need any help.

 

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Customer reply replied 8 years ago

The house in MX is kept seperate. It is not involved in anything to do with the U.S.

 

My questions are: How do I reimburse my self for expenses I incurred from handling the estate without getting taxed as personal income? I was in MX for 3 months taking care of things using my own money...now that I am dividing assets in the U.S., I need to reimburse myself tax free for debts I have incurred which are approximately 16K.

 

Second, I need to be able to take care of the house costs in MX along with care for their 2 dogs. I have no clue when we will beable to sell the house because of the economy and the swine flu which has flattened the MX market for home sales...I am estimating needing 10K set aside for maint. If I take this as personal income, then I will be taxed.

Tax Professional: Lev, Tax Advisor replied 8 years ago

The house in MX is kept separate. It is not involved in anything to do with the U.S.

If you father was US citizen or a legal resident - all his properties should be included into estate regardless if they are in the US or abroad.

If your father was neither US citizen nor a legal resident - only US part of the estate would be included for US tax purposes.

 

My questions are: How do I reimburse my self for expenses I incurred from handling the estate without getting taxed as personal income? I was in MX for 3 months taking care of things using my own money...now that I am dividing assets in the U.S., I need to reimburse myself tax free for debts I have incurred which are approximately 16K.

If you paid some bills on behalf of the estate - you simply provide expense report to the estate and get reimbursed for such expenses - such reimbursement would not be your personal taxable income.

If you receive a compensation from the estate for your personal expenses in connection with your duty as an executor of the estate - for instance - travel expenses - you also may provide expense report with all receipts, etc - and such reimbursement will not be your personal taxable income.

If you receive from the estate - a compensation for your work as an executor - that would be your personal taxable income.

 

Second, I need to be able to take care of the house costs in MX along with care for their 2 dogs. I have no clue when we will be able to sell the house because of the economy and the swine flu which has flattened the MX market for home sales...I am estimating needing 10K set aside for maint. If I take this as personal income, then I will be taxed

If the estate has any funds to be used for maintenance - you may use these funds.

If the estate doesn't have enough funds - it should borrow for bank or from beneficiaries, or from any other source.

You may lend the money to the estate from you own funds - that will not be considered a taxable income for the estate, but you may not deduct that on your tax return regardless if the estate will pay you back later of will not be able to pay you back.

 

If you take a distribution from the inherited IRA and use that money for the estate - it will be taxable income - either for the estate or for beneficiaries - regardless if funds are used for the estate maintenance.

 

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Customer reply replied 8 years ago

Sorry about this back and forth...I knew this was not simple! :)

 

I was instructed by many people to not mix MX with the US...so, even though it may not be correct, I am not mixing the two. With that being said, is there any way for me to pull money from the U.S. estate to be used for future maint. of MX without me getting taxed personally? I would like to close out his U.S. estate and be done with it.

 

How detailed does the expense report need to be to get reimbursed for expenses that I have incurred? Many things in MX didn't have reciepts...

 

I am not going to charge the estate for my time/services as allowable by law. The only thing I want is to be paid for lost wages while I was in MX which is less then what I am able to charge.

Tax Professional: Lev, Tax Advisor replied 8 years ago

There is no problem is asking for clarifications and I am grad that you do so.

 

The main question - if your father was US citizen or a legal resident - all his properties should be included into estate regardless if they are in the US or abroad.

 

You may account for two part of the estate separately - if you want so - but I do not see any tax advantages of doing so.

You will only done with the estate after estate income tax return is filled and all properties and funds are distributed to beneficiaries.

You do not necessary has to sell the property in the estate - but may distribute it to beneficiaries and may close the estate.

 

Requirements to the expense report would be same as if you would file the expense report on your job. You would need receipts to provide a proof for most expenses.

You may also keep canceled checks, or other evidences for expenses.

See detailed requirements here -

Publication 552, Recordkeeping for Individuals

Publication 583, Starting a Business and Keeping Records

 

Compensation for lost wages would be considered your income and will be your taxable income.

Let me know if you need any help.

 

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Customer reply replied 8 years ago

Dad is an U.S. citizen. It is not easy to combine the two into one as you may think....I will have paid a total of 9K to probate in MX. They do things very differently down there...

 

My attorney in MX is also a U.S. citiizen, and a U.S. attorney that has moved down there 20 years ago practicing as a MX attorney also. He advised me to not mingle the two. If you don't live there and know their laws, then I understand why you may find it difficult to understand...by the rules and black and white, I do know what we are suppose to do...but that is not what we are doing...

 

Most of my expenses (90%) incurred are from MX which is why I can't show them in a formal expense form. So, are you saying that I have to submit an "expense form" with reciepts to the governement to show that I should be reimbursed tax free?

 

 

 

 

Tax Professional: Lev, Tax Advisor replied 8 years ago

Dad is an U.S. citizen. It is not easy to combine the two into one as you may think....I will have paid a total of 9K to probate in MX. They do things very differently down there...

You may keep two parts of the estate separately - that is fine... But all estate should be included into the estate if deceased was an US citizen.

As an executor of the estate you are personally responsible for all tax liabilities of the estate.

As long as there is no additional tax liability from the property in MX - I do not see any problem.

 

My attorney in MX is also a U.S. citizen, and a U.S. attorney that has moved down there 20 years ago practicing as a MX attorney also. He advised me to not mingle the two. If you don't live there and know their laws, then I understand why you may find it difficult to understand...by the rules and black and white, I do know what we are suppose to do...but that is not what we are doing...

I do not see any problem as long as your actions would not affect estate income tax liabilities.

 

Most of my expenses (90%) incurred are from MX which is why I can't show them in a formal expense form.

Now you contradict yourself - you want to keep both parts of the estate separately and at the same time you want to deduct expenses in MX on your US part of the estate....

 

So, are you saying that I have to submit an "expense form" with receipts to the government to show that I should be reimbursed tax free?

You do not need to provide the expense report to the IRS. As an executor of the estate - that is your responsibility to account for all expenses and keep the records. Only if the IRS would audit your personal income tax return and/or the estate income tax return - you might be asked to provide supporting documents.

Otherwise - do not send any documents to the IRS.

 

Lev
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Customer reply replied 8 years ago

Thanks for your help...Just wanted to explain...when I say I don't want to mix the two ..I meant regarding the US Tax laws ect...I do want to recoup my 15K that I have spent of my personal money since it doesn't seem like we will be selling the house anytime soon...thats all... I appreciate your help and will go see someone in person since this is a bit complicated.

 

 

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