Estate Tax, Tax Credits, Flood Insurance: An Update on Tax Issues

With such a heavy focus on financial legislation in a significant mid-term election year, here’s a handy guide to what’s happening with the estate tax, energy tax credits, and flood insurance.

You don't have to pay an estate tax on any property inherited in 2010, but it's likely the tax will come back in 2011. Image: DreamPictures/Photodisc/Getty Images

Estate tax in flux

Even top tax experts confess confusion as they try to figure out what’s happening with the estate tax.

Here’s a quick summary: As of October 2010, Congress still hasn’t restored the federal estate tax despite predictions they would reinstate it retroactive to January 1. Now, many experts are saying that Congress isn’t likely to pass a retroactive estate tax this year. The 2011 status remains a mystery.

What should you do?

First, if you inherit an estate in 2010 you get it free of estate tax. However, it’s likely the estate tax will return in 2011. Unless Congress steps in, estates more than $1 million will be taxable.

Perhaps the biggest change applies to the cost basis of property you inherit, including a home:

  • Before 2010, the cost basis was “stepped up” to the market value on the date of death. That is, if you sold your parents’ old house in 2009 immediately after inheriting it, you didn’t pay capital gains taxes on the difference between the sale price and what your parents paid for it some 30 years ago. That is, selling the house was a tax-free transaction.
  • In 2010, however, property has carry-over basis. For property inherited in this year only, you will pay tax on the price difference. But there’s some relief: Executors can add a limited amount of basis to inherited property to save on taxes—the formula can be complex and you should consult a CPA or attorney.

However, these adjustments may not be enough to save you from taxes if you inherit and then sell a home that’s part of an expensive estate in 2010. That is, if a house your parents bought for $500,000 is now worth $5 million, expect a major tax hit if you sell. Talk to an estate planning lawyer before posting a “For Sale” sign on the lawn. The good news is that most experts expect the usual full step-up to return in 2011.

Still time to get green for going green

Being environmentally conscious pays: You still have time to qualify for the 2010 energy efficiency tax credits—but you’ll want to move quickly if you need to hire a contractor and schedule the job. The credit is 30% of the improvement’s cost, to a maximum of $1,500.

You must make these improvements to your existing primary residence—new construction, rentals, and second homes don’t qualify.

Here’s a partial list of improvements that qualify for the energy tax credit:

  • Spray foam, fiberglass, or blow-in cellulose insulation that meets International Energy Code Council requirements, not including installation costs

Go to for more information.

Flood and disaster—you’re covered for another year

Congress has not made a long-term decision on comprehensive flood insurance reform, but to keep the National Flood Insurance Program in force, it’s passed several short-term extensions—the most recent extends it to Sept. 30, 2011. There is talk of a more long-term and robust law at some future point.

However, even with just an extension, you still have some tools:

  • If you itemize your deductions, the IRS allows you to deduct casualty losses, including damages to your home from unexpected events such as tornados, hurricanes, or wind storms.
  • If your home was damaged in a federally declared disaster area, you may get extended tax filing deadlines.
  • The option to decide in which year to deduct disaster losses, allowing you to amend a previous year’s return and putting tax refund money in your hands sooner to help you rebuild.

Peter Fleming is a freelance business writer based in New York City. In the past 15 years he has supervised the renovation of three homes, including a 1901 brick row house, a Jersey Shore beach house, and a Brooklyn condominium.