How to File a Final Estate Tax Return

When someone passes away, a lot has to be done to settle their estate. One of the most important tasks is filing their final tax return. It is a complex process that requires attention to detail, especially in a time of grief and mourning. Luckily, a knowledgeable estate planning attorney can guide you through this process and help ensure your loved one’s wishes are met.

While most people understand that a personal income tax return must be filed when they die, not everyone realizes that an estate tax return is also required. This document essentially looks at everything the deceased person owned on their date of death and reports that to the IRS. The assets that need to be reported can be anything from cash, investments, property and retirement accounts. The estate’s liabilities are also included, such as outstanding debt, funeral expenses and any charitable contributions paid out of the estate.

The final estate tax return is referred to as Form 1041 and, along with state forms, reports all income and expenses of the estate. Income can be things like interest, dividends, the accumulated value of life insurance policies (if the estate is beneficiary), the accumulated value of a retirement account (if the estate is the owner) and proceeds from selling property. Expenses typically include costs of administering the estate (death certificates, copies of documents, postage, reimbursements for telephone or travel expenses, legal, accounting, appraisal fees and any expenditures necessary to sell assets).

Not every estate needs to file this return. In fact, it is only needed for estates that are over the current exemption amount which is 11.7 million dollars in 2021. Trustees or executors of larger estates also have to review any taxable lifetime gifts made and adjust the estate tax credit appropriately.

For the purposes of the death tax, it is important to note that only income earned by the estate after the taxpayer’s death is reportable. This includes the income that would have been reported on a personal income tax return had the taxpayer been alive. This includes such items as stock and bond dividends, rental property earnings, money from the sale of a business and final paychecks or savings accounts.

Unlike Form 706 which reports the estate’s income taxes, this return is not due for 12 months after the deceased’s date of death. However, if the estate earns more income than is reported on the first return filed, it will be required to file additional returns in subsequent years. This is why it is so important to have an experienced estate planning attorney on your side to ensure that your loved ones’ wishes are met and their final tax return is completed correctly. Contact us to learn more about how we can assist you with your estate planning.

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