Estate tax legislative changes over the past decade created a possibility of double taxation on a New York estate’s assets if the decedent died in 2010 and elected carryover basis. Before 2010, and the changes in the federal estate tax system, New York state’s taxation structure provided for an estate tax on an estate’s assets and a corresponding stepped-up tax basis for those assets. However, the federal changes created an unfortunate situation in which the estate tax and income tax systems in New York State would no longer mesh. Because of this, the assets of a 2010 estate would be subject to both the New York estate tax and New York income tax when sold by the beneficiary without the benefit of the stepped-up basis. There is a bill proposed by New York State Assemblyman David McDonough that aims to rectify the situation, but its future is uncertain.1 The bill was referred again to the Ways and Means Committee on Jan. 4, 2012, after it languished there all of last session.
This potential double taxation originated with the adoption of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). While the EGTRRA called for the lowering of income and estate tax rates, it also eliminated the federal estate tax in 2010. This created havoc with estate planning as many believed that Congress would reinstate the tax at the last minute but did not. Also, the EGTRRA added another wrinkle since it provided that property inherited from decedents, when subsequently sold, would have a carryover basis instead of the stepped-up or stepped-down to fair market value basis that normally applies.2
To make matters more confusing, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 act) retroactively reinstated the federal estate tax for 2010.3 The act also provided for an interesting choice: the executor of the estate had to decide whether to elect out of the estate tax and the stepped-up basis that comes with it or instead use the carryover basis. For tax years 2011 and thereafter, the federal estate tax is in effect and the basis on property acquired is stepped-up or stepped-down according to fair market value.
To add an element of urgency to the matter, the Internal Revenue Service (IRS), after many different decisions, finally set a filing deadline of Jan. 17, 2012, to opt out of the estate tax and have the carryover basis rules apply for people dying in 2010.4 Unfortunately, there is no extension available for Form 8939, which is where the assets along with their carryover basis are to be reported. The estate can opt to file an amended Form 8939 by July 15, 2012, although this is the latest possible date that the information can be submitted.5
State Tax System
While this choice is enough to keep estate planners up at night, many did not consider how the changes from the EGTRRA and the 2010 act have affected the state income tax system with regard to basis. Many states have not come out with pronouncements regarding the income tax ramifications of the option to elect out of the federal estate tax for 2010 and the possibility exists that an estate could be treated in different ways for federal and state purposes.
New York has released a Technical Memorandum that has clarified New York State’s position when a federal estate tax return is filed.6 Any election made for federal purposes, such as an election to opt out of the estate tax and choose carryover basis, will be binding for New York state purposes. Therefore if a federal estate tax return is filed that opts out of the estate tax, the carryover basis will be used for New York estate tax purposes as well.
Generally, the New York estate tax conforms to the Internal Revenue Code of 1986, including amendments up to July 22, 1998. As a result, amendments after this date, such as those by the EGTRRA or the 2010 act, do not apply. For that reason, New York State issued the Technical Memorandum to conform with the IRS position concerning carryover basis. For New York estate tax purposes, the date of death value of assets is used to compute the estate tax. However, for New York state personal income tax, the value of any inherited assets sold are valued the same as for federal income tax purposes. If an estate elects out of the federal estate tax for 2010, a beneficiary in New York inheriting assets from that estate would have to use the carryover basis to compute their individual New York state income tax liability.
For example: an estate in 2010 with $1 million in stock with an original cost basis of $0 elects to opt out of the federal estate tax and thus uses the carryover basis of $0. For New York state estate tax purposes the estate will have to pay tax on the $1 million value, which is the date of death value. When the recipient of the stock sells the stock, the beneficiary will have to use the carryover basis of $0, which is the value used on the federal estate tax return, and pay income tax on the gain of $1 million. In essence, the same stock will be subject to double taxation—both New York estate tax and New York individual income tax will be assessed on the conveyance of the value of the stock.
A bill that would alleviate the double taxation on the same assets has been introduced twice by state Assemblyman McDonough. The bill would provide that stepped-up basis would apply to all assets acquired from a decedent. As of the date of this publication, the bill has not yet moved out of committee.
Other jurisdictions have taken similar action in response to federal estate tax laws. California, for example, will allow the taxpayer to continue to use the stepped-up basis for property acquired from a decedent even if they choose carryover basis for federal purposes.7 Hawaii,8 Massachusetts,9 and Oregon10 have ruled that carryover basis is mandatory for all assets received. New Jersey has not issued any guidance with regard to the basis of property acquired by a decedent, but will continue to follow any elections made on the federal return. Connecticut, Minnesota, North Carolina, and Rhode Island have said that they will follow the election on the federal return regarding the basis of assets acquired from a decedent.11
With tax season ending, even if a practitioner does not need to think about the above for estate tax purposes, there could be basis issues when a client acquires property from an estate. If the state in which the decedent lives does not follow the federal rules for basis, gain or loss upon the sale of an asset may have to be computed differently for state and federal purposes.
Jay A. Scheidlinger, attorney and CPA, is a senior manager at J.H. Cohn. Terence Hanley, an attorney and CPA, is a senior accountant at the firm. They can be reached at firstname.lastname@example.org and email@example.com.
1. Bill No. A00140.
2. P.L. 107-16.
3. P.L. 111-312.
4. IRS Notice 2011-66, Rev. Proc. 2011-41.
6. TSB-M-11(9)M, Supplemental Information on New York State Estate Tax Filing Requirements Related to the Federal 2010 Tax Relief Act.
7. Cal. Rev. & Tax. Code §18036.6.
8. Tax Information Release No. 2010-09.
9. Massachusetts basis of property acquired from decedents who died in 2010 or who die in 2011 or thereafter, income tax directive 11-xx, Working Draft.
10. Oregon Revenue Bulletin 2010-07.
11. North Carolina Department of Revenue, Estate Tax Update, Aug. 31, 2011.