Selling a card you inherited - Income tax

[Peter_Spaeth]

Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?

[MikeGarcia]

Originally Posted by Peter_Spaeth

Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?

.; Aw , great . Now you've got all of on here afraid of dying.

..

[Casey2296]

Originally Posted by Peter_Spaeth

Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?

Wouldn’t one get an appraised value at time of death on the assets in order to establish a new cost basis?

[BobC]

Originally Posted by Casey2296

Wouldn’t one get an appraised value at time of death on the assets in order to establish a new cost basis?

You would normally think so, but what I haven't really addressed and mentioned directly yet is that in regard to filing a federal estate tax return, every single U.S. taxpayer has a lifetime estate and gift tax exemption they get to use. What this means is that when a person passes on, whoever is in charge and responsible for the handling of the deceased's estate, they are charged with figuring the current net FMV of the estate. (You do get to deduct some expenses and outstanding debts, so it is a net estate value you get to use for federal estate tax purposes.) Then once you've calculated the decedent's net taxable estate value, you compare that net taxable estate value to the lifetime estate tax exemption amount they have available, and if the available exemption amounts exceeds the net taxable value of the estate, there is no federal estate tax due, and technically no federal estate tax return has to be filed.

Currently for 2022, the lifetime federal estate and gift tax exemption each person has in $12.06M. So if a person passing away this year only has say about $1M-$2M in net FMV of assets owned, including this one particular baseball card supposedly worth $50K, the executor/fiduciary of that decedent's estate knows they are nowhere close to ever being required to file a federal estate tax return for the deceased. So why would they ever bother going through all the time, effort, expense and so on to get all the decedent's assets formally appraised and valued. They really don't need it file anything.

So in that case, the heir who inherited the card probably can't count on the estate's executor/fiduciary having done any appraisal or valuation leg work, and will have to proceed on their own to come up with what the value should be to use for the card's "stepped-up" tax basis on their personal federal tax return. And also figure out how to document that value on their own to satisfy the IRS, should they ever come knocking and asking questions. And that is also why in the original post I made about this topic, I suggested the OP check with the estate's executor/fiduciary anyway to see what, if any, formal or informal appraisal/valuation work they may have done. And to then make sure what the OP ended up using for the card's "stepped-up" tax basis agreed to what the fiduciary/executor of the decedent's estate had come up with. That way should the IRS ever come back IRS ever come back on the heir/OP, they couldn't also go back to the estate and catch the OP/heir using inconsistent FMVs.

And FYI, that lifetime estate and gift tax exemption amount, at $12.06M under current law, changes annually each year due to inflation, and goes up slightly. However, if a person chooses to give gifts in any year that exceed the annual federal gift tax exclusion amount (currently at $16,000 per person for 2022), any excess annual gift to a single person over that $16K amount gets deducted from that person giving the gift's lifetime estate and gift tax exclusion exemption amount. So that gets deducted from what they then get to pass on to their heirs free from estate taxes when they die. In simple English, and using the OP's scenario as an example. If instead of inheriting the $50K card, the person gifted it to the OP this year, and then passed away later on before the year-end. In that case, the $50K gift exceeded the 2022 annual gift tax exclusion amount of $16K by $34K. So the gift isn't taxable to the person giving it, but they have to file a federal gift tax return (Form 706) for 2022, and the $34K excess gift gets deducted from their lifetime estate and gift tax exemption amount and reduces it to $12.026M ($12.06M - $34K). So whoever ends up handling that person's estate, after they pass away later this year, now only has $12.026 of the lifetime estate exemption left they can use to offset against the estate's net taxable value to determine if they even have to file a federal estate tax return, and pay and federal estate taxes due.

The kicker is that the government can change that lifetime estate and gift tax exemption amount whenever they want, if they can get enough votes. As it is, come 2025, that lifetime exemption amount will likely drop by $5M-$6M as part of the sunset provisions of the 2017 Tax Cuts and Jobs Act, along with a lot of the other tax laws and changes passed as part of that act from 2017. That will be a dramatic change that could end up affecting a lot more people's estates in the not too distant future. And the current government administration had already talked about making changes to various aspects of the federal estate laws, such as doing away with the "stepped-up" basis rule for inherited assets, dropping the lifetime estate and gift exemption amount even further, and so on. They haven't gone forward and changed anything....yet, but that could change at anytime. So you have to stay aware of changes to these rules and laws if you have a sizeable estate. Remember this for context, when Hillary was running against Trump, one of her key tax proposal points she kept pushing was to drop that lifetime estate and gift tax exemption amount down to $1M per person. Think about that. Add up the value of your house, 401K, some other savings and assets, and then toss your collection on top of that, and how many of you now may be having to think about owing federal estate taxes after all. A millionaire today is nothing like what one was back when I was a kid

When it comes to thinking about how our collections may impact our families and our estates, it isn't something you necessarily can just do some simple research on, and then set it and forget it. You have to be aware of potential and constant changes to tax and estate laws, as well as changing values to what we have. Ask questions and have some trusted source(s) to got to for help and answers.

I think I have everything pretty much covered now. LOL

[Hondo]

Bob, thank you for taking the time to explain all this detail!
Much appreciated!

[BobC]

Originally Posted by Hondo

Bob, thank you for taking the time to explain all this detail!
Much appreciated!

No problem, hopefully it can be useful information to you and others.

Just remember though, it can, and often does, change dramatically over time. LOL

[BobC]

Originally Posted by Peter_Spaeth

Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?

Sorry, I was updating the post to add more info, and to cover what Adam said so that people would understand that what he posted actually referred to the decedent's estate, and not the personal tax return of an heir who was selling inherited property.

The two may be linked in some aspects, such as being sure to showing the same appraised value of the card for FMV and "stepped-up" basis purposes.

As for your specific question, that could be a real problem. If you look at the last section from my previous post, referring to instructions from IRS Form 8949 (the form on which the sale of the card would be reported) it very specifically spells out the potential for a 20% penalty of any underpaid tax the heir may have because he didn't use and report the same tax basis for the card on his return as it was reported on the decedent' estate tax return. The IRS will also tack on interest for any underpaid tax as well.

Unfortunately, the FMV and basis of the card is determined by the decedent's estate and the executor/fiduciary in charge of it, and is considered the de facto accurate figure(s) to then be used by the heirs. If an heir disagrees with the estate's valuation after the fact, the smartest thing to do would probably be to try and go back to and convince the executor/fiduciary to file an amended federal estate tax return (Form 709), and change the FMV of the card to what the heir believes is correct and accurate, assuming it can be supported and proven by an actual appraisal or valuation. That way the heir can file their personal federal income tax return using a "stepped-up" tax basis for the card that now agrees with the decedent's estate tax return.

However, by filing an amended federal estate tax return, depending on the size of the decedent's estate it is possible that could now result in the decedent's estate owing more federal estate tax (plus interest and penalty) instead. And now you have to remember and consider that the maximum federal estate tax rate under current law is at 40%, while for the heir, the maximum federal LTCG tax rate is only 20%. So in looking at keeping as much money in the family and away from the IRS as possible in this case, it may actually be better for the heir to swallow the mistake, and just use what was shown as the FMV on the originally filed decedent's estate tax return as the "stepped-up" tax basis for the card's sale as reported on the heir's personal federal tax return. The heir may only be getting hit with a 20% tax, whereas on the estate return it may cost the family up to 40% on the same card valuation difference.

In any event, it will end up being a PITA for everyone, and probably require the tax accountant(s) to go back through the heir's personal federal tax return and the decedent's federal estate tax return to figure out the actual tax, penalty and interest costs for the different ways to try and fix this, and see which one costs everyone involved the least amount of money. And that includes the potential added cost for the time and effort to file an amended estate tax return for the decedent's estate.

The one thing you absolutely do not want to do though is to have the heir ignore what may have been reported by the decedent's estate to the IRS in regard to the card's FMV for "stepped-up" tax basis purposes. Showing a different value that does not tie back to what was reported on the decedent's estate tax return will likely get both the executor/fiduciary of the estate, and the heir selling the card, a couple of love letters from the IRS with a few questions for both of them as to what the heck is going on. And the tax accountant(s) likely get(s) to charge both sides even more now to handle the IRS' audit inquiries. Sooooo much fun being a CPA/tax accountant!

[Exhibitman]

I agree, Bob. I cited the regulation only to make clear that the appraisal doesn't have to jump through the same hoops as an appraisal for a charitable donation of an asset like a card. I also agree that the OP's first stop is the executor of the estate or the trustee of the trust (if the item was in a trust) to ask about whether an appraisal was done and whether an estate tax return was filed. The overwhelming majority of estates will not hit the threshold that requires a return (it is over $12 million right now), so odds are that there was nothing filed and no appraisal done. Which brings us to valuation. If the card is a slabbed mainstream card, odds are there are plenty of comparable sales around the time of death that the collector can rely on to make a case for FMV. If the item is esoteric, however, there may be a need for an appraisal from someone who has enough experience in the field to be able to qualify as an expert in court. As I recall, Heritage at one time actually offered that kind of service for a fee, so perhaps that is a place to start.

I guess I am fortunate that all the stuff I inherited from my parents was crap.

[Peter_Spaeth]

Originally Posted by BobC

Sorry, I was updating the post to add more info, and to cover what Adam said so that people would understand that what he posted actually referred to the decedent's estate, and not the personal tax return of an heir who was selling inherited property.

The two may be linked in some aspects, such as being sure to showing the same appraised value of the card for FMV and "stepped-up" basis purposes.

As for your specific question, that could be a real problem. If you look at the last section from my previous post, referring to instructions from IRS Form 8949 (the form on which the sale of the card would be reported) it very specifically spells out the potential for a 20% penalty of any underpaid tax the heir may have because he didn't use and report the same tax basis for the card on his return as it was reported on the decedent' estate tax return. The IRS will also tack on interest for any underpaid tax as well.

Unfortunately, the FMV and basis of the card is determined by the decedent's estate and the executor/fiduciary in charge of it, and is considered the de facto accurate figure(s) to then be used by the heirs. If an heir disagrees with the estate's valuation after the fact, the smartest thing to do would probably be to try and go back to and convince the executor/fiduciary to file an amended federal estate tax return (Form 709), and change the FMV of the card to what the heir believes is correct and accurate, assuming it can be supported and proven by an actual appraisal or valuation. That way the heir can file their personal federal income tax return using a "stepped-up" tax basis for the card that now agrees with the decedent's estate tax return.

However, by filing an amended federal estate tax return, depending on the size of the decedent's estate it is possible that could now result in the decedent's estate owing more federal estate tax (plus interest and penalty) instead. And now you have to remember and consider that the maximum federal estate tax rate under current law is at 40%, while for the heir, the maximum federal LTCG tax rate is only 20%. So in looking at keeping as much money in the family and away from the IRS as possible in this case, it may actually be better for the heir to swallow the mistake, and just use what was shown as the FMV on the originally filed decedent's estate tax return as the "stepped-up" tax basis for the card's sale as reported on the heir's personal federal tax return. The heir may only be getting hit with a 20% tax, whereas on the estate return it may cost the family up to 40% on the same card valuation difference.

In any event, it will end up being a PITA for everyone, and probably require the tax accountant(s) to go back through the heir's personal federal tax return and the decedent's federal estate tax return to figure out the actual tax, penalty and interest costs for the different ways to try and fix this, and see which one costs everyone involved the least amount of money. And that includes the potential added cost for the time and effort to file an amended estate tax return for the decedent's estate.

The one thing you absolutely do not want to do though is to have the heir ignore what may have been reported by the decedent's estate to the IRS in regard to the card's FMV for "stepped-up" tax basis purposes. Showing a different value that does not tie back to what was reported on the decedent's estate tax return will likely get both the executor/fiduciary of the estate, and the heir selling the card, a couple of love letters from the IRS with a few questions for both of them as to what the heck is going on. And the tax accountant(s) likely get(s) to charge both sides even more now to handle the IRS' audit inquiries. Sooooo much fun being a CPA/tax accountant!

I've had personal experience with an appraiser whose schtick clearly was to dramatically understate the value of household items amd antiques to keep down estate tax. Wink wink. It was a family situation and there wasn't much I could do about it and fortunately I had and have no interest in selling anything that came to me, but I wasn't at all happy about it.

[BobC]

Originally Posted by Peter_Spaeth

I've had personal experience with an appraiser whose schtick clearly was to dramatically understate the value of household items amd antiques to keep down estate tax. Wink wink. It was a family situation and there wasn't much I could do about it and fortunately I had and have no interest in selling anything that came to me, but I wasn't at all happy about it.

The value of household items, furnishings and stuff like that is one thing. IRS agents aren't all the pricks that many people make them out to be. At least they haven't been in the past. For things like that, as long as your valuations are somewhat reasonable, I don't think you'll get much of a hassle from them. However, a single $50K baseball card may stick out like a sore thumb to them, and could possibly trigger some inquiries.

Plus, don't forget that this recently passed Inflation Reduction Act, that is expected to shortly be signed by Biden, includes an $80 billion increase to the IRS' budget over the next decade or so. I've heard as part of this huge budget increase that they intend to hire tens of thousands of new IRS employees/agents as a result. So, how much anyone want to bet this is going to result in more audits and investigations of corporate and other high-income taxpayer returns in the near future? And along with going after the more "well-to-do" taxpayers, I can definitely see part of the IRS' expanded scrutiny focusing on estate taxes as well. Oh, and this is also just in time for the start of all the new 1099-K forms that are going to begin being sent out to people in early 2023 for their $600 or more in proceeds from sales using Paypal and other such third-party payment platform services.

And I've actually acted as an estate appraiser myself for a colleague a couple decades ago. Managing partner of a firm I was at had an unmarried dentist friend/client that passed, and he made my colleague the executor of his estate. My colleague knew I was a bit of a collector, so he asked me on company billable time to go through the deceased's collections for estate tax purposes, and figure out what they were worth Back then, Ohio had an estate tax as well, so even if we lucked out and the net value of the estate value came under the federal lifetime estate tax exemption amount, the estate was still going to get hit with Ohio estate taxes. The dentist had several things he collected. Animation cels, poker chips, a small gun collection (had a nice vintage WW II German luger), and baseball cards. The best of his collection was complete '40, '41 Playball sets, all raw and in binders. Was actually kind of fun to learn a bit about some of these other collectibles.

Peter, in your case, I think that the more time that passes, the more likely you are to be okay should you ever sell anything. It is just as hard, if not harder, for the IRS to go back and definitively prove an actual FMV of some somewhat obscure antiques and items from long ago. And don't forget, since the appraiser valued the items low, when you do sell them, the result is bigger gains, resulting in more taxes due. Assuming you even report the sales that is. LOL As I previously mentioned, as long as valuations seem to be at least somewhat reasonable, the IRS is unlikely to argue too much. Plus, the IRS has a three-year statute of limitation on estate tax returns, from the date they were originally filed. So, if these appraisal issues you mentioned were from longer ago than that, I wouldn't go worrying about it at all anymore.

[Peter_Spaeth]

Originally Posted by BobC

The value of household items, furnishings and stuff like that is one thing. IRS agents aren't all the pricks that many people make them out to be. At least they haven't been in the past. For things like that, as long as your valuations are somewhat reasonable, I don't think you'll get much of a hassle from them. However, a single $50K baseball card may stick out like a sore thumb to them, and could possibly trigger some inquiries.

Plus, don't forget that this recently passed Inflation Reduction Act, that is expected to shortly be signed by Biden, includes an $80 billion increase to the IRS' budget over the next decade or so. I've heard as part of this huge budget increase that they intend to hire tens of thousands of new IRS employees/agents as a result. So, how much anyone want to bet this is going to result in more audits and investigations of corporate and other high-income taxpayer returns in the near future? And along with going after the more "well-to-do" taxpayers, I can definitely see part of the IRS' expanded scrutiny focusing on estate taxes as well. Oh, and this is also just in time for the start of all the new 1099-K forms that are going to begin being sent out to people in early 2023 for their $600 or more in proceeds from sales using Paypal and other such third-party payment platform services.

And I've actually acted as an estate appraiser myself for a colleague a couple decades ago. Managing partner of a firm I was at had an unmarried dentist friend/client that passed, and he made my colleague the executor of his estate. My colleague knew I was a bit of a collector, so he asked me on company billable time to go through the deceased's collections for estate tax purposes, and figure out what they were worth Back then, Ohio had an estate tax as well, so even if we lucked out and the net value of the estate value came under the federal lifetime estate tax exemption amount, the estate was still going to get hit with Ohio estate taxes. The dentist had several things he collected. Animation cels, poker chips, a small gun collection (had a nice vintage WW II German luger), and baseball cards. The best of his collection was complete '40, '41 Playball sets, all raw and in binders. Was actually kind of fun to learn a bit about some of these other collectibles.

Peter, in your case, I think that the more time that passes, the more likely you are to be okay should you ever sell anything. It is just as hard, if not harder, for the IRS to go back and definitively prove an actual FMV of some somewhat obscure antiques and items from long ago. And don't forget, since the appraiser valued the items low, when you do sell them, the result is bigger gains, resulting in more taxes due. Assuming you even report the sales that is. LOL As I previously mentioned, as long as valuations seem to be at least somewhat reasonable, the IRS is unlikely to argue too much. Plus, the IRS has a three-year statute of limitation on estate tax returns, from the date they were originally filed. So, if these appraisal issues you mentioned were from longer ago than that, I wouldn't go worrying about it at all anymore.

Bob, I know insurance appraisals are at the other end of the spectrum and tend to be inflated, but the disparity between the estate appraisal and previous insurance appraisals was, to say the least, remarkable. I found the whole thing offensive even if it saved some money. Yes, the SOL has passed so not worried about it from a liability standpoint.

[BobC]

Originally Posted by Peter_Spaeth

Bob, I know insurance appraisals are at the other end of the spectrum and tend to be inflated, but the disparity between the estate appraisal and previous insurance appraisals was, to say the least, remarkable. I found the whole thing offensive even if it saved some money. Yes, the SOL has passed so not worried about it from a liability standpoint.

Yeah, but don't people often suggest one value for purchase/sale, and then tack on another 10%-20%, or more, for insurance purposes? I seem to remember almost every appraiser I've ever seen on Antiques Roadshow say the item is worth X, but then tell the owner to insure it for X + Y. I believe they do that to cover possible increases and short-term spikes in future value. So I wouldn't get too worked up about that difference, and would have no problem telling an IRS agent to go watch an episode or two of Antiques Roadshow if they had a problem or didn't understand. LOL

[ALBB]

wow, thats an awful lot of reading !!