As a result of the reinstatement of the federal estate tax for 2010 by the Unemployment Insurance Reauthorization and Job Creation Act of 2010 (HR 4853), passed by Congress on December 16, carryover basis won’t apply to most estates of decedents who died during 2010. The tax basis of most inherited property will be the fair market value on the date of death, referred to as “stepped up basis”, even though the new basis can be lower than the decedent’s cost.
Under the changes enacted in the Act, the federal estate tax exemption equivalent for 2010 through 2012 is $5 million and the estate tax rate for taxable estates exceeding $5 million is 35%.
The carryover basis regime would be an unwieldy one, requiring determining what the decedent paid for inherited assets. A special form reporting this information would be included with the decedent’s final individual income tax return. The IRS hasn’t released the form yet.
Estates may elect to avoid the estate tax for 2010 as if the new tax law wasn’t passed. In that case, carryover basis will still apply to those estates.
Since very few estates have a value exceeding $5 million, most estates won’t have carryover basis for 2010.
With these changes, many estates that have been held open because of a question whether the estate tax would be reinstated for 2010 can now be closed.