Seven death tax questions

By Kenneth Rivera Robles, Attorney at Law and CPA
Sunday, August 28, 2022
El Nuevo Día

A saying goes "nothing is certain in this world except death and taxes". This reflects two things that seem to be inevitable and detestable to most people. The saying has been attributed to the American scientist, politician and writer Benjamin Franklin and the American writer Mark Twain, but it is by the English writer Christopher Bullock (1716). It is sometimes lost perspective that death has several contributory consequences that we will discuss here.

  1. How do you fill out the forms in the year of death?

When a person dies, an income tax return must be filed at Form reflecting his or her income up to the time of death. Previously, in the case of married persons, when one died one had to make a Form as married until the moment of death and the surviving spouse made a second Form for the remainder of the year. Example 1: John died on September 30, 2021 and was married to Jane. Under the above rule a Form was made as married from January 1, 2021 through September 30, 2021. Then Juana had to make an additional Form from October 1, 2021 through December 31, 2021. This requirement was quite burdensome since, as we know, wage, income and credit reports are prepared on an annual basis, which could lead to processing problems. Law 52-2022 changes this rule for years beginning after 2022 and now in the year of death only one Form will be prepared as married.

Example 2. Maria dies on October 31, 2023 and was married to Mario. As a consequence of Law 52, it will usually only be necessary to prepare a Form as married for the entire year 2023.

  1. What was Puerto Rico's inheritance tax prior to 2018?

In Puerto Rico there was a tax on property transfers made as a consequence of the death of a person. The tax was 10% of the fair market value of the estate's assets. Several deductions were available including a deduction for property located in Puerto Rico, a deduction for transfers between spouses, and a fixed deduction of $1,000,000. This tax was paid in a Form (Model SC 2800B) that was due 9 months after the death of the deceased. In the case of persons deceased before January 1, 2011, other rules apply to them that we are not discussing in this article.

  1. How is the inheritance tax in Puerto Rico as of 2018?

The inheritance tax was eliminated by Law 76-2017 for persons deceased from January 1, 2018 onwards. Although there is no tax liability, it is still necessary to make an informative Form (Model SC 2800 C) of the deceased person's assets. The Form is filed electronically through SURI within 12 months after the death of the deceased.

  1. What is the treatment for the person receiving the inheritance?

Assets received as a result of an inheritance are excluded from the taxable income of the heir. It is important to note that the heir will also "inherit" the basis in such asset. For that reason, when the heir sells the inherited property, he/she must use the basis that the deceased had at the time of death.

Example 3: Victor's uncle died on March 1, 2022 and left him an estate in Rio Grande. The farm had cost the uncle $100,000 and at the time of his death had a value of $400,000. When Victor receives the farm, he does not have to recognize income on his income tax return at Form . The tax basis in the farm for Victor will be $100,000. The tax basis in the estate for Victor will be $100,000. If in two years he sells the estate for $600,000 he will have a taxable gain of $500,000 ($600,000 sales price minus the inherited basis of $100,000).

  1. What is the treatment of life insurance policies?

The payment of a life insurance policy received on account of the death of the insured is also an exclusion from the taxable income of the recipient.

Example 4: Bruno's brother dies and had designated Bruno as the beneficiary of a $1 million life insurance policy. This payout will be an exclusion from Bruno's taxable income and he will not be taxed on it.

  1. Does the estate have to file income tax returns?

If the estate is not distributed immediately and the estate generates income after the death of the deceased, it will be necessary for the estate to file a tax return Form to report the income and pay taxes on such amounts. This is Form 480.8 and is filed on the 15th day of the fourth month after the close of the year.

Example 5: Fabio died in 2021 and left an investment account worth $2 million. The heirs have not settled the estate and during 2021 income of $80,000 was generated. The estate has to file a Form to report this income and pay the tax.

  1. Does the U.S. inheritance tax apply?

In the U.S. there is still an extremely complex estate tax with several exemptions and exclusions. This tax will apply to U.S. citizens, U.S. residents at the time of death and persons with assets in the U.S. at the time of death. An extremely important fact is that for purposes of this tax, persons born (or naturalized) in Puerto Rico are not treated as U.S. citizens. Here it is important to be well advised in order to mitigate or even in certain cases avoid this federal tax.

Although these are highly unpleasant topics, it is advisable to plan to prevent contributory problems at the time of death.

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