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Tax Talk with George Saenz

Ask the tax adviser

A spouse's tax liability; and figuring the tax bills of IRA and annuity beneficiaries.

Wife's liability for husband's tax debt

Dear Tax Talk:
My husband and I have filed income taxes separately for the past three years. He owes income tax from three years ago that he was paying out. He has stopped paying. Can I be liable or can my property (home and five acres) be in jeopardy? We are separated and I live in the home.

Dear Sandra:
Since you did not file a joint return with your husband for the delinquent year you are not liable for his unpaid tax. It's generally good practice for a married couple experiencing financial and marital problems to file on a separate basis to avoid liability for each other's taxes.

You refer to the home and five acres as your property, so I assume he is not a joint owner with you. If this is the case, and you do not live in a community property state, then the Internal Revenue Service cannot go after this property. If you do own the property jointly or live in a community property state, then IRS may be able to place a lien on the property for your husband's unpaid tax bill. Since the IRS collection procedure varies by state, I would recommend consulting a good attorney in your area for additional advice.

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Calculating taxes of IRA and annuity beneficiaries

Dear Tax Talk:
How do you calculate the income taxes paid by the beneficiaries of either a traditional IRA or a deferred annuity after estate taxes have been paid? I would appreciate information regarding taxes and income in respect of the decedent (IRD).

Dear Roy:
Both a traditional IRA and a deferred annuity are items of income when inherited. Generally, a survivor or beneficiary reports income from these items in the same way that the decedent would have reported the income.

Generally the full amount of a traditional IRA will be includible in income of the beneficiary when received. A traditional IRA is an IRA where the annual contributions have been fully deducted. In a recent column, I discussed the rules relating to required distributions from inherited IRAs.

A traditional IRA is income in respect of a decedent (IRD) and accordingly a portion of the estate taxes attributable to including the value of the IRA in the estate is deductible by the beneficiary. To do this, figure the estate tax on the estate excluding the IRA and compare it to the estate tax including the IRA. The difference in the estate tax is the amount deductible by the beneficiary. Deduct it on Schedule A as a miscellaneous itemized deduction not subject to the 2 percent floor (line 27 of 2000 Schedule A). Deduct it ratably over the time that you include the IRA in income.

A deferred annuity is the term applied to an annuity contract payable sometime after the contract is entered into. This is compared to an immediate annuity, which is one calling for annuity payments to commence at the time the contract is entered into (i.e. no deferral or accumulation period). Both types of annuities have payout options.

A payout option refers to the term over which the annuity will be paid. For example an annuity can be paid over a single life (in which case there would be nothing left to inherit, unless the annuity was guaranteed for a certain term, which is another payout option) or joint lives.

An annuity is not subject to the IRD deduction unless the decedent dies after his annuity starting date. There are various rules applicable to inclusion in income of an annuity depending on the payout options. These rules are further complicated by the fact the annuity was inherited. Therefore, at this point, I recommend that you review the annuity contract with a qualified accountant to determine the proper manner for including the payments in income and claiming a possible estate tax deduction.

If you want to read more, check out Bankrate's Tax Tip on IRD.

-- Posted Nov. 17, 2000

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