Since January 2010 Oregon tax professionals have been asking the Oregon Department of Revenue which income tax basis rules apply to 2010 Oregon Estates.
Generally, this has been a pretty easy question to answer. The traditional rule has been that most assets belonging to a decedent receive a tax basis step-up equal to the fair market value as of the decedent’s date of death.
However, the Federal income tax basis rules are different this year. For 2010 estates the traditional rule does not apply. Generally the 2010 Federal rules are:
1. First, determine the modified carry over basis (“MCOB”) of each asset held by the decedent. The MCOB is the lower of decedent’s actual basis or fair market value as of the date of death for each asset.
2. If the value of decedent’s assets exceeds the MCOB, then an additional basis increase of up to $1.3 million may be allocated to these assets.
3. If the decedent is married and the value of decedent’s assets exceeds the MCOB, then the assets passing directly to the surviving spouse or into a qualified trust for the benefit of the surviving spouse, up to an additional $3 million can be added to the basis.
The Oregon Department of Revenue recently released Oregon Revenue Bulletin 2010-07 announcing that the Oregon income tax basis rules of 2010 Oregon estates will follow the Federal rules that are applicable this year.
For estates that have asset values in excess of what can be covered under these basis adjustment rules, the 2010 Oregon rule can result in a double tax. First, the Oregon inheritance tax due 9 months after the date of death, and then an Oregon income tax based on the same asset value later on when the asset is sold. This double tax problem occurs with the larger estates becuase they will not receive a full income tax basis increase on the assets that are part of the Oregon estate.
The Oregon Inheritance Tax Workgroup of the Oregon Law Commission is looking into this matter, and there may be corrective legislation, but it will not be enacted until some time in 2011.
