Someone trusts you so much that they name you to settle their estate after they die. You’re honored they have that much confidence in you, but you don’t think much about what’s involved in settling an estate.
Among the long list of items you have to deal with is settling the deceased’s tax bill. You may have to file just one return for the person who’s passed away, but there could be several. Strauss Attorneys, PLLC, an estate planning firm, has published a list of four possible tax returns the IRS may require.
Individual Tax Return
Typically, you’ll need to file a tax return for the deceased, assuming they earned enough income in the year they died to require the filing of an individual income tax return. You’ll file an IRS Form 1040. Unless the deceased lived in one of the nine states with no state income tax, you’ll probably have to file a state income tax return as well.
Form 1040 will report any income earned through the date of death and will also notify the IRS that the individual has died. In most cases, this return is due on the same date as if the individual was still alive, typically April 15th.
Depending on the time of year when the individual died, two sets of individual returns may be required. For instance, if someone dies on February 23, 2002, you’ll most likely have to file two income tax returns. One has to be filed by April 15, 2022, to report income for the 2021 tax year. The second will be filed by April 15, 2023 reporting income from January 1, 2022, through the date of death.
If the deceased wasn’t up-to-date on their personal income tax filings, you’re responsible for filing tax returns for any outstanding years and making sure that the estate pays any outstanding taxes, penalties, and interest.
Fiduciary Income Tax Returns for the Estate and/or Trust
Depending on the amount of income earned from investment assets, a Fiduciary return, IRS Form 1041 might need to be filed instead of Form 1040. What determines whether a Fiduciary return is required is fact-specific and often complex, so it’s advisable to consult a professional who’s experienced in preparing fiduciary income tax returns.
The deadline for filing a Form 1041 varies depending on whether the entity for which the return is filed elects a fiscal year or calendar year. Estates typically elect a fiscal year, which begins on the date of death and ends on the last day of the month prior the individual died. For instance, a person who dies February 23, 2022, the fiscal year runs February 23, 2022 through January 31, 2023.
If the individual had a revocable living trust, it might be possible to report the trust income on the same return as the estate’s return for the first two years following death. Otherwise, a trust must report its income on a calendar year basis.
Whether a fiscal year or calendar year is used, the return is due three months and fifteen days after the close of the tax year. A return will need to be filed for each year the estate or trust remains open, and a final return will be filed for the year any remaining estate or trust assets are fully distributed. The beneficiaries will receive a Schedule K-1 reflecting any income or deductions they need to report on their personal income tax returns.
Estate Tax Return
An estate tax return is IRS Form 706. It reports the value of assets owned by an individual at the time of death and assesses any estate tax owed.
Currently, there is an estate tax exemption of $11,700,000 for individuals. Should that amount change, the estate tax will be based on the exemption existing at the time of death, the amount of exemption the individual used during their lifetime through gifting, the recipients of the individual’s assets at the time of death, and whether the individual received any “Deceased Spousal Unused Exclusion” which would have been received from the estate of a deceased spouse.
If an estate is considered taxable, along with Form 706, Form 8971 may be required as well as Schedule A. It will be due no later than 30 days after Form 706 was due or no later than 30 days after Form 706 was filed.
Gift Tax Return
If the deceased individual made a taxable gift in the year they died, you will need to report it on a gift tax return, IRS Form 709, which is generally due April 15 of the year following the gift.
Gift tax returns don’t need to be filed unless the deceased gave someone other than their spouse money or property worth more than the annual exclusion, which is $16,000 in 2022.
Missing a tax filing deadline can create costly penalties as well as personal liability for the person settling the estate.
This article is presented as information only and should not be considered tax, legal, or financial advice.