Inheritance Tax In Colorado

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David M. Kaufmann, CPA

Voice: 720.493.4804

Email: contact2@kaufmann-cpa.com

Note: This is a complicated subject. We will only touch on some topics. We recommend that you talk these issues over with an attorney and a CPA.

What is Inheritance Tax?

Inheritance tax is a tax paid by a beneficiary after receiving inheritance.  If the inheritance tax rate is 10%, and you inherit $100, you pay $10 in inheritance tax.

The good news is that since 1980 in Colorado there is no inheritance tax, and there is no US "inheritance tax," but there are other taxes that can reduce inheritance. You could consider that taxes on inheritance, even if that is not "inheritance tax."

Estate Tax

Estate tax is a tax on assets typically valued at the date of death. Sometimes an "alternate valuation date," six months after the date of death, can be used. If the asset value exceeds the "exemption" amount, there can be a significant estate tax at rates between 35% and 55%.

Currently the estate tax has an exemption amount of over $12 million ($ 6 million after 2025) and a tax rate of 35%.

Estate INCOME Tax

Estate income tax is a tax on income, like interest and dividends.  However, estate income tax returns can be fairly complex, even if there is very little income.

If you are a personal representative or executor, you should make sure your accountant knows how to prepare an estate income tax returns (Form 1041). Only a small percent of Form 1040 preparers are capable of preparing estate income tax returns.

Beneficiaries commonly receive taxable income from estates. This should not be confused with inheritance tax. If you inherit $1,000 of stock and you receive $50 in dividends from that stock, you will pay tax on the $50 of dividends.  This is where a good tax preparer comes in handy. If you have certain types of estate expenses, some of those expenses can reduce the $50 of dividend income. You might even end up with tax losses and deductions rather than taxable income!

The estate can take deductions for "Administrative Expenses" as long as a proper election (statement) is made in the estate income tax return.

If there is a trust involved with the estate, serious thought should be given to making a Section 645 election. By making a Section 645 election, the tax returns for the trust and estate can be done with one federal tax return instead of two. There are other reasons, including year-end and estimated tax considerations, for making the Section 645 election.

In the last year of an estate beneficiaries might be able to deduct expenses that the estate was unable to deduct. Again, an accountant that understands estate and trust tax can pay off.

An estate that holds a residence has some special tax issues. Is there a loss? Is it deductible? Were there fix up costs? These may require special treatment.  It is our experience that, when an estate sells a house, heirs usually get to deduct a loss that will reduce their individual taxes.  In many cases, obtaining an appraisal as of the date of death might save thousands of dollars in taxes.

Do You Need Some Assistance?

Please feel free to call us at 720-493-4804.  We can setup a phone or in-person meeting. We can discuss tax and issues that are critical for trustees and personal representatives to know to avoid common costly mistakes. For many estate or trust related issues, we can assist you at a much lower price than using an attorney.  However, if you do need an attorney, we know many attorneys that specialize in this area.

The information contained here are simplifications of complex subjects.  Talk to your CPA or attorney if you want more information.