When a loved one passes away, estate and trust taxes need to be filed. The executor or personal representative is responsible for preparing these returns and paying any tax that may be due. The process can be complicated and a CPA who serves Trusts and Estates may be needed.
The income tax return for an estate is called Form 1041 and is filed under the estate’s name and taxpayer identification number (TIN). It reports assets, gains, losses, deductions, and credits. It is also used to report distributions from the estate to beneficiaries. Schedule D is used to report capital gains and losses and Schedule K-1 is used to report beneficiary shares of income.
In addition to the federal Form 1041, there may be state income tax returns and tax forms required for the estate’s accounting period. These returns are due by the 15th day of the fourth month after the end of the accounting period if the estate uses a fiscal year, or April 15 of the following year if it uses a calendar year accounting period. The estate and beneficiaries may also be required to file a gift tax return. Gift tax returns are due annually for the prior year if taxable gifts made in that year exceed the annual exclusion amount.
Determining which tax returns are required and when they are due is a complex task. An experienced estate and trust tax practitioner can help you make this determination and ensure that all required returns are filed on time.
A deceased person’s final income tax return must be filed if the gross estate plus any prior year gifts and qualified terminal illness trusts exceeds the filing threshold. This threshold is currently $11.7 million in 2021. The amount is adjusted for inflation each year.
The death of a loved one is always an emotional event. Taking care of the legal and financial aspects of the estate can be stressful and time-consuming. There are many details that must be handled, including opening new bank accounts, transferring brokerage accounts into the estate name and obtaining tax ID numbers. There are also numerous forms to fill out, such as Forms 1099 for investment earnings and adjusting purchase and sale records to reflect date-of-death values.
The executor of an estate must understand what documents are required and when they are due in order to avoid fines and penalties. A lawyer who specializes in probate can guide you through these processes. Nolo’s lawyer directory makes it easy to find a local probate attorney. You can also find helpful guidance in The Executor’s Guide by Mary Randolph, a book that is part of Nolo’s Law Library. If you have questions about estate and trust taxes, contact a local tax attorney or an accountant who serves Trusts and Estates. The cost of an experienced professional will often pay for itself in the time saved. A simple mistake can cause the IRS to assess substantial fines and interest.
