final return: IRD calculation

Before you can do the 1040 and apply any IRD, you have to do the 706 first. Its quite complex and I'm not going to even try to explain it in this space.

You should work with your CPA/tax advisor and tax atty (if preparing the 706).

IRD is definately NOT a do it yourself thing.

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Really? The total value of the estate is decidedly under $2M. Under $1M, even. Quite a bit under.

The first rule is that you have to apply her accounting method. The proration you described is accrual accounting, while most individuals use cash accounting.

OK, I guess. The 1041 instructions say "All accrued income of a decedent who reported his or her income on the cash method of accounting, ..."

The instructions for form 706 say

Which Estates Must File For decedents dying in 2007, Form 706 must be filed by the executor for the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $2,000,000

Page 7 of the instructions for form 706 say:

Interest. Interest accrued to the date of the decedent's death on bonds, notes, and other interest-bearing obligations is property of the gross estate on the date of deaht and is included in the alternative valation.

But I have no idea what the alternative valation is.

Which for an individual using cash accounting will mean everything earned that wasn't included on the decedent's 1040.

Yeah. The question is, should interest 'earned' before death, but not credited until after death (ie, during the last statement period) be include on the 1040, or the the estate's 1041?

The final return is income tax. The alternative valuation date is with respect to estate tax. They have little or nothing to do with each other.

Stu

Not under cash accounting as it wasn't PAID (or placed into the account).

This obviously confuses you. Go see a tax expert.

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The instructions appear to say that in this particular case, even though the decedent used cash accounting, it's proper to use accrual accounting for this particular purpose.

I don't know what the Regs say.

I'm not one.

Seth

decedent who reported his or her income on the cash method of

My question posted earlier is the same as Seth's. Small estate with bonds that were redeemed shortly after Mom passed away. The difference in my case between showing the accrued interest in her final return or not is that her medical deductions substantially exceed her income. The accrued interest sops up some of that under- utilized deduction, so to speak. Is it improper to show the accrued interest on her final return?

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FWIW, my conclusion - based on (a) the general tone of some of the responses, and (b) that the IRS instructions don't include an example of pro-rating the income, is that the final return gets income that's credited before death, and the estate gets anything credited thereafter.

IOW, they don't mean "accrued" in the sense of "accrual method". It's kind of pocket change in my case, so I'd probably be safe either way.

Thanks to all who replied.

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George, that is my conclusion as well. The one exception are Savings Bonds where the interest can be shown as income as it accrues, including the final return.

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