Tax Alert: Changes to Form 706 Estate and Gift Tax Return

Some preparers are making errors using Form 706 software

More On Tax Planning

from The Advisor's Professional Library
  • IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
  • IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.

The IRS on March 25 announced problem areas and changes with Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return.

Form 706 must be filed for the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $5 million.

The IRS noted that for estate tax returns after Dec. 31, 1976, Line 4 of Form 706 lists the cumulative amount of adjusted taxable gifts within the meaning of IRC section 2503. The computation of gift tax payable (Line 7 of Form 706) uses the IRC section 2001(c) rate schedule in effect as of the date of the decedent's death, rather than the actual amount of gift taxes paid with respect to the gifts.

With the top bracket tax rates decreasing from 55% (in 2001) down to 35% (in 2010) and a periodic drop in rates in between, the IRS said, it has encountered situations where gift taxes paid were greater than the tax calculated using the rate in effect at the date of death.

The alert noted that some Form 706 software used by practitioners require a manual input of the gift tax payable line. It said that a number of preparers were reporting gift taxes actually paid rather than calculating the gift tax payable under date-of-death rates. These errors result in underpayment of estate tax due. Cases with this issue will involve estates where large gifts were made during life and at a time when tax rates were higher than at date of death.

The alert also noted these exclusions:

  • The annual exclusion for gifts is $11,000 (2004−2005), $12,000 (2006−2008 and $13,000 (2009−present).
  • The applicable exclusion amount is increased to $5 million for estates of decedents dying on or after Dec. 31, 2009
  • The applicable exclusion amount for gifts made after Dec. 31, 2009, is $1 million.  For gifts made after Dec. 31, 2010, the applicable exclusion amount is increased to $5,000,000.

706 Filing Instructions

The IRS said that, although few significant changes have occurred on Form 706, one change will affect all filers: the elimination of the allowable State Death Tax Credit. For decedents dying in 2005 and later years, it is a deduction.

The IRS pointed out that the due date for filing a Form 706 for estates of decedents dying in 2010 is Sep. 19, 2011. As well, a request for an extension of time to file an estate or gift tax return must go to the Cincinnati Service Center, even if income or other tax returns are filed elsewhere.

Reprints Discuss this story
This is where the comments go.