Final Estate Tax Return For Fiduciaries

The death of a loved one can be emotionally challenging, and figuring out what to do next can feel daunting. As a fiduciary — someone who is entrusted with another person’s money — the executor of a deceased individual’s estate must file a final income tax return and pay any taxes due.

The tax form required to report these taxes is IRS Form 1041, U.S. Income Tax Return for Estates and Trusts. This return is filed by the executor of the deceased person’s estate and identifies income and deductions. It is similar to the personal income tax return, Form 1040, that we file each year.

Depending on the type of income, there may be additional forms and schedules to complete. A common example is a capital gains tax, which must be reported on Schedule D. Other examples include interest on estate bank accounts, salary that isn’t paid to a deceased person before their death and rent from property owned by the estate. If the estate has nonresident alien beneficiaries, there may also be a special schedule for those individuals to report their share of income.

Estate assets include money in savings accounts, CDs and mutual funds, stocks and bonds, 401(k) and 403(b) accounts, life insurance policies and rental property. The value of these assets is stepped up to fair market value as of the date of death and any gain or loss is reported on the estate’s tax return. In addition, any debts of the estate must be paid before the beneficiaries can receive their inheritance.

Not all estates need to file an income tax return, though. If a deceased person’s estate is below the current exemption amount (which is 11.7 million dollars in 2021) and there are no lifetime gifts made, no filing is required. However, if the deceased person’s estate was above the exemption amount or they gave away substantial amounts of wealth during their lifetime, a return is necessary.

When to file

An estate’s tax return must be filed within 12 months of the deceased person’s date of death. If more time is needed, you can file Form 7004 to request an extension. For more guidance on filing an estate tax return, including how to gather the necessary documents and information, check out The Executor’s Guide by Mary Randolph (Nolo). You can also find a qualified probate attorney in your area by searching Nolo’s lawyer directory.

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