Expenses of administering an estate can be deducted either from the gross estate in figuring the federal estate tax on Form 706 (PDF), United States Estate (and Generation-Skipping Transfer) Tax Return, or from the estate's gross income in figuring the estate's income tax on Form 1041 (PDF), U.S. Income Tax Return for Estates and Trusts. However, these expenses cannot be claimed for both estate tax and income tax purposes. The expenses incurred In the sale of property are deductible from the gross estate only if the sale was necessary to pay decedent debts, or to preserve or distribute the property of the estate.

For more information, refer to Publication 559, Survivors, Executors, and Administrators, designed to help those in charge of the property (estate) of an individual who has died. Also, refer to Publication 950, Introduction to Estate and Gift Taxes.

In general, administration expenses deductible in figuring the estate tax include: fees paid to the fiduciary for administering the estate; attorney, accountant, and return preparer fees; expenses incurred for the management, conservation, or maintenance of property; expenses in connection with the determination, collection, or refund of the estate's tax liability.

For additional information on this subject see Estates.

References:

• Publication 559, Survivors, Executors, and Administrators
• Publication 950, Introduction to Estate and Gift Taxes
• Form 706 (PDF), United States Estate (and Generation-Skipping Transfer) Tax Return
• Form 1041 (PDF), U.S. Income Tax Return for Estates and Trusts

A so-called pure trust is an arrangement that purports to create a separate entity without actually altering the taxpayer's control over the property or business transferred to the pure trust. Generally, the trust issues certificates that represent ownership of the trust. Notice 97-24 addresses certain abusive trust arrangements. Often "pure trusts" are involved in those arrangements. The pure trust may be treated as a sham for federal tax purposes depending on the trust terms and its actual operation. Therefore, the taxpayer who transfers property or a business to the trust must report all the income earned by the trust and is liable for the taxes. The transferor may not circumvent the tax system by structuring transactions with the purpose of evading taxes.

References:

• Notice 97-24
• Publication 2193 (PDF), Too Good to Be True Trusts
• Abusive Tax Shelters

Tax shelters reduce current tax liability by offsetting income from one source with losses from another source. The IRS allows some tax shelters, but will not allow a shelter which is "abusive." An abusive shelter generally offers inflated tax savings which are disproportionately greater than your actual investment placed at risk. Generally, you invest money to generate income. However, an abusive tax shelter generates little or no income, and exists solely to reduce taxes unreasonably for tax avoidance or evasion. In comparison, a legitimate tax shelter often produces income and involves a risk of loss proportionate to the expected tax benefit. Abusive tax shelters are often marketed in terms of how much you can write off in relation to how much you invest. This "write off" ratio is often much greater than two-to-one as of the close of any of the first five year ending after the date on which the investment is offered for sale. A series of tax laws have been designed to halt abusive tax shelters. An organizer of a potentially abusing tax shelter who doesn't maintain a list of investors is subject to penalty of $50 per failure, per person, unless due to a reasonable cause and not willful neglect.

Any person participating in an abusive tax shelter may be penalized up to the lesser of $1,000 or 100% of the Gross Income derived or to be derived from the activity.

For additional information, refer to Tax Topic 454, Tax Shelters .

References:

• Publication 2193 (PDF), Too Good to Be True Trusts
• Tax Topic 454, Tax Shelters

The alternative minimum tax prevents a taxpayer with substantial income from avoiding a significant tax liability. It equals the excess of the tentative minimum tax over the regular tax. The tax laws give preferential treatment to certain kinds of income and allow special deductions and credits for some kinds of expenses. The alternative minimum tax attempts to ensure that all individuals who benefit from these tax advantages will pay at least a minimum amount of tax. The alternative minimum tax is a separate tax computation that, in effect, reduces the benefit of certain deductions and credits, thus creating a tax liability for an individual who would otherwise pay little or no tax. You may have to pay the alternative minimum tax if your taxable income for regular tax purposes, plus any of the adjustments and preference items that apply to you, is more than a specified exemption amount. The Sales and Growth Tax Relief Reconciliation Act of 2003 increased the exemption amounts to $40,250 (from $35,750) for unmarried individuals, and to $58,000 (from $49,000) for joint filers. To determine if you may be subject to the alternative minimum tax, refer to the Instructions for Form 1040 for line 41, or refer to Form 6251 (PDF), Alternative Minimum Tax - Individuals.

References:

• Instructions for Form 1040
• Form 6251 (PDF), Alternative Minimum Tax - Individuals

We address only federal tax and procedural issues at this site. If you have questions about state taxes, visit the Federation of Tax Administrators (FTA) links to State Tax Forms. You may be able to locate the state tax information you need. Otherwise, you will need to contact your local state tax office. I may provide you with your tax phone number if you like.

References:

• State Tax Forms

Whether you are entitled to an additional state tax refund depends on the nature of the change which was made to your federal return. For example, if on your federal tax return, you used the wrong line on the tax tables to figure your tax, this may not have an impact on your state tax return. However, if the change was made to the amount of your taxable income on your federal return, it may have an impact on your state tax return. Contact your state tax office for additional information. It is helpful to have a copy of your tax returns (federal and state) and a copy of the IRS notice when you call.

To access the state you need to direct your question to, please go to our Alphabetical State Index.

References:

• Alphabetical State Index