There are a number of reasons why your 2011 tax liability may be larger than you expected, many of which stem from tax breaks offered in previous years.
For example, if you took the 2008 First-Time Home-Buyer Tax Credit, 2011 marks the second year of loan repayment. This confuses a lot of taxpayers who didn’t realize this tax credit acted only as an interest-free loan for 2008 and is expected to be repaid beginning in 2010.
Taxpayers who converted their traditional Individual Retirement Accounts (IRAs) to Roth IRAs back in 2010 had the option of spreading the tax liability associated with the conversion over two years- 2011 and 2012. So, one half of the income taxes owed on that conversion are due this year.
For individuals who died in 2010, carryover basis rules apply rather than a full step-up in basis on inherited assets for executors opting out of estate tax rules. Typically, for purposes of reporting basis, inherited assets are valued at date-of-death. But, in 2010, estate executors could choose to go with rules that used carryover basis instead, which essentially assigns basis using the lesser of adjusted basis or the fair market value of an asset at the date-of-death. Keep in mind that if the original purchase took place many years ago, the adjusted basis may be very low. Capital gain and loss is calculated by subtracting the basis from the sale proceeds, so an heir could be subject to a significant gain on the sale of the inherited asset. Now, the executor/personal representative may allocate up to $1,300,000 and up to an additional $3,000,000 to increase the assets that are inherited by the surviving spouse or a QTIP (Qualified Terminable Interest Property) Trust for the benefit of the spouse, respectively.
Please note that executors are required to complete Form 8939 Allocation of Increase in Basis for Property Acquired from a Decedent. All estate beneficiaries will need a copy of the Form 8939 with the new cost basis on all inherited assets as they prepare their 2011 Individual Income Tax Returns to report gain or loss on Schedule D. If you did not receive a copy of this Form 8939 and the supporting schedules, contact the estate executor.