Tax Planning for Estates

Warning: What You Don’t Know About Income Tax Basis Could Hit Your Bottom Line

Income tax basis may not be the most exciting topic to read about. However, it is a critically important topic to anyone who owns significant assets. Gaining an understanding of the basics of basis is a way to avoid costly mistakes.

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

According to IRS Tax Topic 703, your basis “is generally the amount of your capital investment in a property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.”

In plain English basis means the cost you paid for an asset, plus any amount you paid to improve the asset, less any deductions you’ve taken against the asset. This means that your basis is used to determine the amount of capital gain or loss to report on your income tax return when the asset is sold.

While it’s not a particularly glamorous concept and it can be confusing at times, basis remains a critical factor in any estate plan. Failing to update one’s estate plan or ignoring a low cost basis when property is gifted or sold can lead to disastrous tax consequences. So before you gift or sell that AT&T stock you inherited from Aunt Betty, give me a call first. I am here to answer all your questions.