How to File a Final Estate Tax Return When a Loved One Passes Away

Often, when a loved one passes away, the executor of their estate is responsible for filing income tax returns for the deceased person and beneficiaries. While this can be an emotional time, taking a methodical approach and seeking expert help can make the task easier and ensure all tax obligations are fulfilled.

The first income tax return to file is the deceased person’s final Form 1040, which must be filed by April 15 of the year following the death. While you are filing this return on the deceased person’s behalf, use their social security number and taxpayer identification number (TIN).

Once the decedent’s final Form 1040 is filed, the next step is to file a federal estate tax return, known as Form 1041. The estate’s taxable year begins on the date of death and ends on December 31. However, the estate can elect to have its taxable year end on October 31, and it can also choose to have a short-year tax period of 12 months.

A Form 1041 is used to report the estate’s taxable income, which can be earned from various assets such as real property and investments. When completing the Form 1041, you must list the decedent’s name and TIN on the return. In addition to listing taxable income, you can claim deductions such as the cost of administering the estate. These expenses include attorney’s fees, executor’s fees and other professional costs. You can also take a deduction for any income that is distributed to the beneficiaries.

The final estate tax return is due nine months from the date of death unless an extension is requested. During this time, it is important that the executor of the estate carefully review all assets and debts in order to determine the tax liability.

If the net value of the deceased person’s estate is below the current filing threshold (which is $11.7 million in 2021), then no estate tax is owed and a return is not required. However, if the gross estate plus back gifts exceed the threshold, then a Form 706 must be filed.

In some states, including California, there is an additional state inheritance tax. This is in addition to any federal inheritance tax. It is also possible that there may be local taxes in addition to these state taxes.

Unlike the federal estate tax, state inheritance taxes are typically levied on the basis of the property’s fair market value at the date of death, not its actual sales price. This is why it’s vital to obtain the proper documentation from the family and advisers in order to complete state inheritance tax returns.

In most cases, the tax basis of the property will be “stepped up” to its date-of-death value, which means that no capital gains taxes are due when it is sold. However, there are some situations where the tax basis of the property must be reduced, such as when the property is purchased by a non-spouse.

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