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What Is the Federal Estate Tax?

The federal estate tax applies to large estates. The year of the decedent’s death determines the qualifying value of the estate. If you are administering an estates that qualifies, you must complete Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Follow the correct procedures for filing Form 706, and be sure to avoid undervaluing estate assets.

The federal estate tax is the granddaddy of the transfer-tax system. Estates valued in excess of $2.5 million for people who died in 2008, $3.5 million in 2009, and $1 million in 2011 must fill out Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return and pay whatever tax is due.

The federal estate tax is not deductible on the estate income tax returns.

If you’re lucky enough to be administering a qualifying estate, you’re entitled to all the fun of preparing Form 706.

Keep the following points in mind when filing Form 706:

  • The estate tax is due to the IRS nine months after the decedent’s date of death. Prepare Form 706 accurately and file and make payments on time to avoid penalties.

  • When filing federal estate tax returns, (Form 706), be sure to get written proof of the mailing date from the delivery service. The mailing day is considered the date of filing and of payment of the tax.

  • File your 706 and pay the tax on time, because you incur penalties for late filing and late payment unless you can show reasonable cause for the delay.

  • Avoid undervaluing estate assets. If the IRS catches you undervaluing assets not only do you have to pay the additional tax, but valuation understatements that result in tax increases of more than $5,000 also cost you a 20 percent penalty. The IRS defines a valuation understatement as reporting the property’s value as 65 percent or less of its actual value on the Form 706.

    The penalty jumps to 40 percent for property valued at 40 percent or less of actual market value. Although, in most cases, you certainly want to use the lowest valuation supportable, never undervalue assets.

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