So you may have read my post about the estate tax leaving us for 2010 here, and wondered, “what on earth is this carryover basis thing he’s talking about?”  And if you weren’t wondering that, pretend you were (or leave the page), because here is the (relatively) short answer.

For estate planning purposes, carryover basis means that when you sell an asset you must use the basis (typically the “cost”) of the person you received the asset from, to determine your gain (e.g. “profit”).  So, if  Great Uncle Joe purchased a 1957 Chevy BelAir Hardtop for $5,000 in 1957, it’s worth $45,000 when he dies, you inherit it from him when he passes, and then you sell it for $50,000 a couple of years later, you will pay tax on the difference between what you sold it for and what he paid for it . . . $45,000.  I’m not an appraiser of classic collector cars, so these number could we way off.  This is considerably different than how it used to be (see my previous post “Hasta La Vista, Estate Tax” to learn more).

Congress, in an effort to “soften the blow” a little bit , amended section 1022 of the internal revenue code to allow for a basis adjustment (i.e., increase the basis) of $1.3 million for non-spouse beneficiaries and $3 million more ($4.3 million total) for spousal beneficiaries (the first number is only $60,000 for a non-resident who is not a citizen of the US).

Clear as mud, right?  If you would like to know more or would like clarification on any of this post or the previous one, just let me know via comment or the Contact Us section of our website.  Here’s to an exciting 2010!