4 Common Taxes Affecting Probate Transfers

1. Ordinary Income Tax:  This is the income tax reported annually in tax returns by most working adults. Additionally, a tax return for the decedent’s final year is usually required. For example, if a person dies on August 15, 2014, the Personal Representative will need to file a return by April 15, 2015 for the decedent’s 2014 income. The return is marked “Final Return” on the first page.

In addition, if the estate has income during the period of administration, then the estate will need to file an “Estate Return.” In some cases, it is advisable to file the return even if the estate does not have income. In other cases, a small amount of income may be reported on the beneficiaries’ personal returns.

2. Gift and Estate Tax: This is a tax levied by the U.S. and State of Colorado on transfers by gift or by reason of death exceeding $5,250,000. Very few families pay this tax. Gift taxes are the responsibility of the giver of the gift, not the receiver.

3. Capital Gains Tax: This is a tax levied on the increase in value of an asset. It is calculated at the time the asset is transferred. In most cases, that is on the sale of the asset. A recipient of a gift receives the “basis” of the giver in the gift at the time of the transfer. The “basis” is the amount the owner paid for the asset, plus capital improvements, less depreciation. “Capital gain” is the amount of the value transferred less the owner’s basis. A special rule allows beneficiaries of an estate to receive a basis greater than the decedent owned. The estate and heirs are considered to have basis equal to the market value of the asset on the date of decedent’s death, or a “stepped up basis.”

4. Local Property Taxes: Many assets, including real estate, are taxed each year by local government based upon asset value. As an example, a residence in Jefferson County, Colorado that is worth $300,000 would have an annual tax of between $1,500-$3,000 depending on its exact location and the various applicable local governments. The tax is owed every year and is generally payable by April 30th for the prior year tax. In Colorado, senior citizens are often taxed at a lower rate. Therefore, when the owner dies, the estate may have to pay at a higher rate for the year of the owner’s death. Certainly, the following year will be at the normal rate.