Estate Tax Returns

For tax purposes, the deceased and his or her estate are two distinct taxable entities. The executor of the decedent’s estate will need to file a final 1040 on behalf of the decedent by April 15th of the year following the date of the decedent’s death.

The Final 1040

If the decedent didn’t earn a great deal of money in the year that he or she passed away, you may not have to file a final 1040. The 2019 limit is approximately $20,000 for a married individual who would have filed jointly, but the limit can and does change regularly.

In practice, however, a final 1040 is almost always filed because it’s the best way to let the IRS know that the decedent has passed away. The surviving spouse and the decedent can still file a joint tax return for the year the individual passed away, unless the surviving spouse has remarried. When this is the case, the decedent’s filing status will be “married filing separately”.

Nearly all of the same rules apply to the final 1040 as any other 1040, but you should expect a few unpleasant surprises. If the decedent didn’t file for a year or two or has outstanding tax liabilities, you’ll probably learn about them when you’re dealing with the final return.

The IRS is aware that this is its last opportunity to collect, so it will go through the deceased’s tax history with a fine-tooth comb to identify any missed payments and potential revenue. You should, therefore, always consult with a good CPA prior to filing any final income tax returns.

Do You Need to File a Tax Return for the Estate (IRS Form 1041)?

IRS Form 1041, which is very similar to IRS Form 1040, is frequently referred to as a “fiduciary” return because it is filed by the executor of the deceased’s estate who has a fiduciary responsibility to act in the best interest of the estate.

The executor has to file a 1041 (the return form for estates and trusts) if the estate earns more than $600 in a year. The form must be filed using the taxpayer ID obtained when opening the estate account.

The estate’s income can be in the form of interest on investments, rent from property owned by the decedent, and even the salary the individual earned before death but was collected by the estate.

Choosing The Tax Year

The executor must choose the estate’s tax year. Timing the return properly can have considerable tax benefits (another good reason to consult with an experienced tax professional). Most estates will only need to file one 1041, but if probate goes on for an extended period of time, more than one may need to be filed.

Deductions

Every estate is allowed a $600 exemption and can also wipe out estate income with deductions, which include:

  • Income distributions to the decedent’s beneficiaries
  • Executor and other professional fees
  • Administrative expenses for the estate, such as court costs
  • Miscellaneous expenses such as postage, safe deposit box rental, and travel expenses if they exceed 2% of the estate’s adjusted gross income

Medical Expenses

Although it is not possible to deduct medical or funeral expenses with IRS Form 1041, it might be possible to deduct medical expenses on the decedent’s 1040.

Disbursements

Should disbursements be made to the decedent’s beneficiaries, they will be liable for paying income tax on the amount they received. When filing IRS Form 1041, the executor is required to send each beneficiary a Schedule K-1 form, indicating the total amount in disbursements the beneficiary received that tax year.

Payment

The executor is also responsible for ensuring that whatever taxes are owed by the estate get paid from the estate’s assets.

Get Help

Though you may, as executor of the decedent’s estate, be inclined to file IRS Form 1041 by yourself, they can be very tricky, particularly the deductions. Therefore, you should consult with a qualified a tax professional to avoid making any mistake that could potentially lead to an audit