Estate Tax Basics

If you’ve just lost a parent, spouse or other family member, you’re learning that not only is the loss an emotional trauma, but the loss creates a bunch of tax headaches as well.

We want to start by first offering our condolences to you and your family.

Let us try to help you and your family, too, by providing a birds-eye view of the tax returns the estate owes the federal and state tax authorities. We’ll also try to provide the basic information you need if you’re the one having to deal with this stuff.

Final 1040 Individual Income Tax Return

Someone needs to file a final 1040 income tax return for the decedent. In the case of a married couple, the surviving spouse probably files the return. If a court has appointed a personal representative or other estate administrator, that appointee probably files the return. The final 1040 return is due April 15^th in the year following the death.

706 Estate Tax Return

If the decedent’s estate is large, the estate will owe the federal government and probably the state government an estate tax return and very possibly estate taxes. However, most estates are not large enough that estate tax returns and estate taxes are owed the government. For example, currently only estates greater than $1,500,000 owe the federal government estate taxes. (Note: Estate taxes are calculated as a percentage of the total estate using a Form 706.) The 706 estate tax return is due nine months after the decedent’s death.

1041 Estate Income Tax Return

The estate itself—in other words, the assets the decedent owned and which it distributes to beneficiaries in the months after the death—almost always owes the federal and state government a tax return. This is the tax return on which estate income and estate deductions are shown. The taxable income or loss generated by the estate, however, isn’t taxed directly to the estate but instead is allocated to the beneficiaries. Due dates for estate income tax returns are a little bit tricky and represent a tax planning opportunity. In a nutshell, the estate income tax return (the 1041 return) is due on the 15^th day of the fourth month after the estate’s tax accounting year ends. However, as long as the estate’s first accounting year isn’t longer than twelve months, the estate can choose which month ends the tax accounting year for the estate. For example, if someone passes away on October 15^th of, say, 2014, the estate’s income tax year can end on October 31^st, 2014, or on November 30^th, 2014, or on the last day of any other month through September 30^th, 2015.

One other note about 1041 estate income tax returns: The personal representative or estate administrator needs to get an employer identification number, or EIN, from the Internal Revenue Service for use in reporting its income and deductions. Often the attorney probating the estate gets an EIN, but you can also get one yourself using the SS-4 form.