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.

 

Estate Tax Returns FAQs

While every state varies on how they handle taxes during the probate process, Florida has no estate tax, or death tax, on the state level and no inheritance tax for beneficiaries. For Florida estates, the only tax concern is potential federal estate tax liability, as well as potential capital gains exposure. The federal estate tax only comes into play for an individual who dies having an estate with assets valued over $11.18 million. An estate worth more than $11.18 million has a potential estate tax liability and will be required to file a 706 estate tax return.

It is advisable that the personal representative, aka executor, of the estate set aside a sufficient reserve of assets to cover potential taxes. If you are not sure whether your estate will be impacted by taxes or not, consider reaching out to an experienced probate attorney that can guide you through the process and advise you in the best plan for transferring your assets to your loved ones after death.
The estate tax is a tax levied on certain assets left to your beneficiaries after death. The estate tax, sometimes referred to as a death tax, is imposed on the federal level and can also be applied on the state level, depending on the state in which the decedent was domiciled at the time of death. The current estate tax exemption on the federal level is rather large, amounting to $11.18 million per individual, or $22.8 million for married couples. As long as you have less than $11.18 million at the time of death, your estate will not be subject to any federal estate tax. Florida is such a popular choice for retirees and senior citizens, in part because the state has no state level death tax, nor any income tax, unlike many states in the northeast, which are known for taxing quite heavily.
The personal representative will be responsible for filing the final individual income tax return (Form 1040) for the person who passed away, as well as any necessary estate income tax return (Form 1041). Estate income tax returns are only required if estate assets generate more than $600 of income annually.

In Florida, there’s no state-level death tax or inheritance tax, but there is still a federal estate tax requirement, so if an estate is valued at more than $11 million, there is a potential federal estate tax bill, and then a return would have to be filed (Form 706). The number of estates that require a Form 706 to be completed is minuscule. For any probate tax matter, it is important to work with an experienced Florida probate attorney and accountant.
One of the duties of the personal representative of an estate is to pay the estate’s debts, often referred to as “creditors” during the probate process. This includes any taxes that the decedent owes to the federal government. The personal representative will often be responsible for filing the decedent’s final income tax return, Form 1040, as well as any necessary estate income tax return, Form 1041. In Florida, there is no state level estate tax, aka death tax, as well as no inheritance tax. The vast majority of estates are well below the threshold for federal estate tax liability with the exemption being over $11 million per individual at the moment.

For most estates going through probate, the IRS will not be served with notice to creditors and will not file a claim in the proceedings. If you are uncertain regarding the decedent’s tax liability, it is prudent to obtain the last three years of the decedent’s tax returns and to file a request for a quick assessment from the IRS. If you have any particular questions about the taxation of an estate, we recommend that you contact an experienced accountant or trust an estates attorney to help guide you through the process.

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.

Give the Florida Probate Firm a call at 561-750-1040 to arrange a free consultation. We look forward to serving you.