From AIM Financial | Tax Preparation and Tax Planning

What Are IRS Form 8971 and Schedule A?

Inheriting property can create important tax considerations for beneficiaries and estate representatives. Whether an inheritance includes real estate, investments, business interests, or other assets, understanding the property’s tax basis is essential when the beneficiary eventually sells it or uses it in a taxable transaction.

IRS Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, is used by certain estate executors to report information about property distributed or expected to be distributed to beneficiaries. Schedule A, which accompanies Form 8971, provides beneficiary-specific information about certain inherited property and its reported estate tax value.

For individuals and families in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan, understanding these forms can help prevent confusion about inherited assets and future tax reporting.

The forms are not required for every estate or inheritance. The filing requirement generally applies to an executor or other person required to file Form 706 or Form 706-NA under the applicable estate tax rules, subject to exceptions. See the official IRS instructions for Form 8971 and Schedule A.

Why Is Form 8971 Important?

One of the most important concepts in inherited-property taxation is tax basis. Basis is generally the amount used to calculate taxable gain or loss when property is sold or otherwise disposed of.

Inherited property often receives a basis determined under special rules applicable at the owner’s death. Depending on the circumstances, the starting basis may be related to the property’s fair market value at the date of death or an applicable alternate valuation date. Special rules and exceptions can affect the result.

Form 8971 and Schedule A support the consistent-basis reporting requirements under federal tax law. For property subject to those requirements, a beneficiary generally cannot claim an initial basis higher than the estate tax value reported on Schedule A.

For example, suppose an estate reports qualifying inherited investment property at a value of $200,000 on the applicable Schedule A. If the beneficiary later sells that property, the beneficiary must determine the proper tax basis using the applicable rules and reported value. The beneficiary should not simply substitute a higher value without determining whether the tax law permits it.

Accurate documentation can help beneficiaries and their tax preparers calculate gains and losses correctly when the assets are eventually sold.

Who Must File Form 8971?

The filing responsibility generally belongs to the executor of an estate, or another person required to file the applicable federal estate tax return under the law.

Potential situations include:

• An estate required to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
• An estate required to file Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return for Nonresidents Not Citizens of the United States.
• An estate that distributes property subject to the consistent-basis reporting requirements.

There are exceptions. For example, Form 8971 generally is not required when the gross estate, adjusted taxable gifts, and specific exemption fall below the applicable basic exclusion amount. Certain estate tax returns filed solely for particular elections or other limited purposes also may be excepted.

The executor must review the current IRS instructions to determine whether Form 8971 is required. The fact that an estate distributes an inheritance does not, by itself, mean that this form must be filed.

What Information Is Reported?

Form 8971 and Schedule A serve related but different purposes.

Form 8971

Form 8971 generally identifies the decedent, provides information about the executor, and identifies beneficiaries who must receive Schedule A or who received an applicable optional Schedule A. The executor attaches copies of the required schedules when filing the form with the IRS.

Schedule A

Schedule A reports information about the property acquired or expected to be acquired by a particular beneficiary, including the applicable estate tax value and identifying details for the property.

Depending on the circumstances, information can include:

• The beneficiary’s identifying information.
• A description of the inherited property.
• The applicable estate tax value reported for the property.
• Information identifying where the property was reported on the estate tax return.
• Additional information required by the form’s instructions.

The executor should make sure that property descriptions and reported values agree with the relevant estate tax records.

Important: The executor generally provides each Schedule A only to the beneficiary identified on that schedule. The executor does not give beneficiaries a copy of Form 8971 itself.

When Is Form 8971 Due?

Under the IRS instructions, Form 8971 must generally be filed with the IRS, and each required Schedule A must be furnished to the appropriate beneficiary, by the earlier of:

1. Thirty days after the due date of Form 706 or Form 706-NA, including extensions; or
2. Thirty days after the date the estate tax return is actually filed.

If a beneficiary acquires additional property after the applicable reporting deadline, or previously reported information becomes incorrect or incomplete, the executor may need to file a supplemental Form 8971 and provide an updated Schedule A.

The deadline for a supplemental filing depends on the reason for the update. In certain cases involving property acquired after the original deadline, the instructions specify a January 31 deadline in the year following the beneficiary’s acquisition. Changes to previously reported information can have a different deadline.

Because these deadlines can be strict, estate representatives should maintain records of distributions, valuations, beneficiary communications, and filings.

Common Mistakes to Avoid

Several issues can complicate inherited-property reporting:

• Assuming every inheritance requires Form 8971.
• Confusing the estate’s filing responsibilities with the beneficiary’s personal income tax obligations.
• Reporting a property value that does not agree with the applicable estate tax records.
• Failing to provide Schedule A to the correct beneficiary.
• Overlooking the need for a supplemental filing when information changes.
• Assuming the value shown on Schedule A automatically resolves every basis question for every type of inherited asset.

Beneficiaries should keep Schedule A with their inheritance records and provide it to their tax preparer when the property is sold, transferred, or otherwise involved in a taxable transaction.

How AIM Financial Can Help With Inherited-Property Tax Questions

Inherited property can raise questions that extend beyond the estate administration process. Beneficiaries may need to determine their basis, report a sale of inherited investments or real estate, calculate a capital gain or loss, or understand which documents their tax preparer needs.

AIM Financial helps individuals and families with tax preparation questions and federal income tax reporting. If you live in Grand Rapids, Kentwood, Wyoming, or elsewhere in West Michigan, contact AIM Financial to discuss your tax preparation needs and learn what records may be important for your return.

If you have inherited property, keep your estate documents, valuation information, distribution records, and any Schedule A you receive. Having these records available can help your tax preparer evaluate the appropriate reporting when the property affects your tax return.

Contact AIM Financial for tax preparation assistance and help organizing the information needed to report inherited assets accurately.

Disclaimer: This article is for general educational purposes and is not individualized tax, legal, or estate-planning advice. Form 8971 filing requirements, inherited-property basis, and supplemental reporting rules depend on the facts and applicable law. Consult the current IRS instructions and a qualified tax professional about your situation.