How do I reduce my tax liability from settlement monies received on behalf of my deceased father's estate?
Posted September 22, 2014 3:23pm
The settlement amount is compensation for services performed by your father and is therefore income of the estate. Are you the administrator of your father's estate? If so, then the check may have been sent to you as such, and not to you in your personal capacity.
You need to clarify these matters because if the money was sent for the estate - i.e. sent to you as administrator of the estate - then it is income to the estate and the estate must report it and pay tax on it on an income tax return for the estate.
If the estate was closed or had already distributed all of your father's property, then that item most likely belongs to one or more of the heirs - i.e. if the estate was already closed, then everything the estate owned has already been distributed, which means that the estate has distributed the right to receive that income. If this is the case, then the payment is what's called "income in respect of a decedent" (aka IRD), and the
beneficiary(ies) entitled to receive it will have to report it on their own income tax returns and pay tax on it. If estate tax was paid with respect to this amount, then the beneficiary(ies) who include it in their income may be able to deduct the estate tax attributable to this amount (it's unlikely, but you will have to check the estate tax returns to be sure).
Basically, you can't do much to reduce the tax on the amount - it's compensation for services rendered and thus is ordinary income - but you do need to make sure it gets reported by the right person or persons so I would suggest you speak with an accountant or CPA to make sure it gets treated correctly.
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