How to File a Final Estate Tax Return

The death of a loved one can bring complicated financial issues, including taxes. It’s not just state inheritance taxes that can come into play — federal estate and income taxes may also be due. Fortunately, the IRS has created an income tax filing process called Form 1041 to deal with this issue.

It focuses on the income generated by an estate or trust and the expenses created in managing that income. It is similar to the personal income tax return that is filed by individuals each year. It is typically due four months after the end of the estate’s tax year. In addition, it is possible that the estate may be required to file an alternative fiscal year return, such as ending on March 31, rather than December 31.

The estate’s income is derived from many sources, such as unpaid salary of the deceased person before his or her death, interest on an estate bank account and rent from property included in the estate. Some of this income is taxed at the highest rates, such as bond interest. The estate’s tax practitioner can control the amount of tax that is paid by choosing the method of reporting bond interest on the estate income tax return.

A deceased person’s final income tax return is filed by the executor or administrator of his or her estate, or by the surviving spouse, or by a person who has been appointed by the court to administer affairs relating to the estate. The return is filed using the same forms that would be used by a living person, but with “Deceased:” written at the top of the form and the name of the deceased person and his or her date of death.

The same basic rules apply to the return as for a living person, including the fact that most deductions that are allowed to individuals are also allowed to estates. In addition, the deceased person’s beneficiaries are not taxed on their share of the estate’s income unless it is a taxable distribution (i.e., income in respect of the decedent). Earnings on money in savings and investments that accrue after death are not reported on the final return. They are reported on the beneficiary’s own return or on the estate’s or trust’s income tax return, whichever is appropriate.

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