A few tax questions

[missingmom]

What is the name of your state (only U.S. law)? Ohio
I think I will have a few tax questions that I will ask on this thread. I will start with my first one. My Mom passed away in September, 2008. She had 3 CD accounts at one bank that were POD to her 4 children. We obtained that money last October. I know it passes outside of probate but does it need to be included on our Federal tax return or is it treated like life insurance paid out to individual beneficiaries?

I tried to look this up online but could not quite get the answer to that specific question. My husband and I file jointly and I have been preparing the taxes for years but we decided to hire a professional tax preparer this time due to this and other tax questions we are not quite sure about. I wanted to get an idea of what we need to bring to the tax preparer ahead of time. Thank you.

 

[anteater]

The transfer of ownership is not a taxable event.

Any interest earned after Mom's passing is.

 

[tranquility]

I have no idea what you are asking. What federal tax return? Who's federal tax return? What do you mean by "include" it?

 

[TinkerBelleLuvr]

I think she is referring to the monies received from the CD.

 

[tranquility]

If so, the OP as beneficiary reports the income earned on cashing in the CD. It is not pro-rated back to the time of death. Per Code Section 691(a)(1).

 

[LdiJ]

If so, the OP as beneficiary reports the income earned on cashing in the CD. It is not pro-rated back to the time of death. Per Code Section 691(a)(1).

OP was asking if the ENTIRE amount of the cashed in CD's was income and had to be reported on his/her return, which is of course not true. The cash itself is not taxable income, only the interest earnings on the cash is.

In any case, the OP will receive a 1099 INT that will show the amount that needs to be reported on his/her tax return.

 

[missingmom]

Taxable interest

Thanks for the responses. I forgot there was a 1099INT form sent that I gave to my oldest brother who is executor of our Mom's estate. The total amount of interest earned on the 3 CD's in 2008 was around $2,600. We divided the cashed in amount of the CD's 4 ways. Each sibling got 1/4 so each of us would divide $2,600 by 4 and report that as interest income on our respective tax returns?

The only thing is, I did another internet search on the subject and found a website (from 2 years ago) where someone asked a similar question. It sounded like the amount of taxable interest for the beneficiaries would be the amount earned from the date of death-9/20/08 to the time the CD's were cashed-10/06/08. That would make a huge difference on the amount of taxable interest to the beneficiaries.

If that is true, then would the rest of the interest earned on the CD's in 2008 be reported as interest income on the tax return that will be filed for my Mom? I believe the Probate Attorney will be filing my Mom's tax return for 2008. My brother has not called the Probate Attorney recently about filing the tax return but he needs to get moving on that. Thanks again.

 

[LdiJ]

Thanks for the responses. I forgot there was a 1099INT form sent that I gave to my oldest brother who is executor of our Mom's estate. The total amount of interest earned on the 3 CD's in 2008 was around $2,600. We divided the cashed in amount of the CD's 4 ways. Each sibling got 1/4 so each of us would divide $2,600 by 4 and report that as interest income on our respective tax returns?

The only thing is, I did another internet search on the subject and found a website (from 2 years ago) where someone asked a similar question. It sounded like the amount of taxable interest for the beneficiaries would be the amount earned from the date of death-9/20/08 to the time the CD's were cashed-10/06/08. That would make a huge difference on the amount of taxable interest to the beneficiaries.

If that is true, then would the rest of the interest earned on the CD's in 2008 be reported as interest income on the tax return that will be filed for my Mom? I believe the Probate Attorney will be filing my Mom's tax return for 2008. My brother has not called the Probate Attorney recently about filing the tax return but he needs to get moving on that. Thanks again.

If your mother's estate cashed in the CDs and then distributed the proceeds to the heirs, then the income would be reported on your mother's estate tax return.

In whose name was the 1099-INT?

 

[tranquility]

I know it passes outside of probate but does it need to be included on our Federal tax return or is it treated like life insurance paid out to individual beneficiaries?

Yet,

If your mother's estate cashed in the CDs and then distributed the proceeds to the heirs, then the income would be reported on your mother's estate tax return.

Each of these statements could be correct. Both of them cannot be correct. (Absent an irrevocable trust as CD beneficiary.) Which statement is correct?

 

[anteater]

I know that it is bad to assume and I should wait until the OP responds about the 1099. But, since 1099 was used in the singular, I am guessing that the 1099 was issued to Mom.

A question to LdiJ and Tranquility. Assume the facts are as the OP stated: 1) Date of death = 9/20/08; 2) CD's liquidated 10/6/08. And assume that the POD beneficiaries liquidated them (so that the probate estate is out of the picture) and that the 1099 was issued to Mom.

Since ownership passes to the POD beneficiaries at DOD, there's probably some interest rightfully attributable to the beneficiaries - maybe 15 days. And, if you get really sticky, there might be some IRD depending upon when the bank actually credits interest to the CD accounts.

As a practical matter given the relatively minor amounts invovled, if the 1099 indeed was issued to Mom, would you attempt to sort that out or just let it be reported on Mom's final return?

 

[tranquility]

Anteater, I answered that question in my second response. Per Code Section 691(a)(1), all the interest belongs to the beneficiary and none of it is income in respect to the decedent.

 

[anteater]

Anteater, I answered that question in my second response. Per Code Section 691(a)(1), all the interest belongs to the beneficiary and none of it is income in respect to the decedent.

It's been a long time since I've read the code, but I'll go look. But what do you mean by "all the interest"?

 

[LdiJ]

It's been a long time since I've read the code, but I'll go look. But what do you mean by "all the interest"?

I shouldn't be guessing, but I am assuming that he is assuming that the interest was not constructively received until the CD was cashed...making all of the interest taxable to the beneficiary.

However, not all banks, in all states, treat all CDs the same as far as constructive receipt of the interest is concerned. In some situation the taxpayer even has a choice as to how to have the interest paid out.

That is why I asked in whose name the 1099 INT was issued.

 

[tranquility]

Regs. Sec. 1.691(a)-2. Inclusion in gross income by recipients.

--------------------------------------------------------------------------------

(a) Under section 691(a)(1), income in respect of a decedent shall be
included in the gross income, for the taxable year when received, of:

(1) The estate of the decedent, if the right to receive the
amount is acquired by the decedent's estate from the
decedent;

(2) The person who, by reason of the death of the decedent,
acquires the right to receive the amount, if the right to
receive the amount is not acquired by the decedent's estate
from the decedent; or

(3) The person who acquires from the decedent the right to
receive the amount by bequest, devise, or inheritance, if
the amount is received after a distribution by the
decedent's estate of such right.

These amounts are included in the income of the estate or of such persons
when received by them whether or not they report income by use of the cash
receipts and disbursements methods.
-----------------
Regs. Sec. 1.451-2. Constructive receipt of income.

(a) GENERAL RULE. Income although not actually reduced to a taxpayer's
possession is constructively received by him in the taxable year during
which it is credited to his account, set apart for him, or otherwise made
available so that he may draw upon it at any time, or so that he could
have drawn upon it during the taxable year if notice of intention to
withdraw had been given. However, income is not constructively received if
the taxpayer's control of its receipt is subject to substantial
limitations or restrictions. (emphasis mine)

The question is framed as to what a limitation is by section 2:
(2) The fact that the taxpayer would, by withdrawing the earnings
during the taxable year, receive earnings that are not substantially
less in comparison with the earnings for the corresponding period to
which the taxpayer would be entitled had he left the account on
deposit until a later date (for example, if an amount equal to three
months' interest must be forfeited upon withdrawal or redemption
before maturity of a one year or less certificate of deposit, time
deposit, bonus plan, or other deposit arrangement then the earnings
payable on premature withdrawal or redemption would be substantially
less when compared with the earnings available at maturity);

What is the penalty on the CD?

I agree constructive receipt is the key, I just tend to constructive receipt on CDs when matured. It is a facts anc circumstances question and can certainly see how some banks/states might treat a CD as an OID-type thing.

 

[anteater]

Thanks, Tranq. I see where you are coming from.

But I think that it is a stretch. From experience only, I've never seen a bank treat a CD as having an OID. More like a passbook savings account (but with a possible penalty for early withdrawal.)