tranquility
Senior Member
What is the name of your state (only U.S. law)? CA (But Federal is focus of question)
I'm not really looking for an answer, but for how to look at things.
Taxpayer sues deceased's estate planning attorney for advice to deceased and settles. Because of planning, taxpayer has to pay additional amounts in property taxes for as long as property is held. (Basically, could not take benefit of law allowing basis retention for transfer between parent and child.) Settlement is to compensate for the direct financial loss. The "loss" was not deducted, but the difference between what the property tax would have been and what it is will be deducted every year it is paid. Taxpayer is a cash basis taxpayer.
Is the settlement taxable? In this year?
Some possibilities. First, it is completely taxable in this year and will be deducted in future years. Not a great outcome for the taxpayer, but, will certainly make the IRS happy. Second, though the taxpayer is cash basis, because of the tax benefit rule, the income is taken in for each year the deduction is taken until it is used up. Making the settlement a wash. Third, we reduce the basis of the property by the amount of the settlement and take normal deductions for property tax payments. Fourth, we reduce the basis of the property by the amount of the settlement, take in income and a deduction each year for the difference in property tax payment and increase the basis by the difference each year. Fifth?
Again, the easiest is just to take in the income now and the deduction over time. Any ideas on how to not make that happen?
I'm not really looking for an answer, but for how to look at things.
Taxpayer sues deceased's estate planning attorney for advice to deceased and settles. Because of planning, taxpayer has to pay additional amounts in property taxes for as long as property is held. (Basically, could not take benefit of law allowing basis retention for transfer between parent and child.) Settlement is to compensate for the direct financial loss. The "loss" was not deducted, but the difference between what the property tax would have been and what it is will be deducted every year it is paid. Taxpayer is a cash basis taxpayer.
Is the settlement taxable? In this year?
Some possibilities. First, it is completely taxable in this year and will be deducted in future years. Not a great outcome for the taxpayer, but, will certainly make the IRS happy. Second, though the taxpayer is cash basis, because of the tax benefit rule, the income is taken in for each year the deduction is taken until it is used up. Making the settlement a wash. Third, we reduce the basis of the property by the amount of the settlement and take normal deductions for property tax payments. Fourth, we reduce the basis of the property by the amount of the settlement, take in income and a deduction each year for the difference in property tax payment and increase the basis by the difference each year. Fifth?
Again, the easiest is just to take in the income now and the deduction over time. Any ideas on how to not make that happen?