How to Prepare a Final Estate Tax Return

If your loved one left a large estate, there may be several federal tax forms to file. There is the Form 1040 personal income tax return, as well as forms for the estate and any revocable trusts set up during life. There is also the Form 1041, which reports all of the income and expenses of the estate. Finally, there are the state death taxes and any other state tax returns that may be required.

The first step in preparing the deceased’s final tax return is to gather all of the financial records and personal information. This is often easiest if the deceased has given instructions in his or her will for someone to be responsible for filing the tax return and has already named that person. It is also helpful to gather the deceased’s previous tax returns, which can be obtained from the IRS by requesting a transcript of the return using Form 4506-T.

Once you have all of the information gathered, it is time to prepare the deceased’s final return. The Form 1041 is the estate income tax return and must be filed within four months of the end of the deceased’s tax year. The tax year is usually a calendar year, but the executor can elect to use a fiscal year.

In addition to reporting income, the Form 1041 is used to claim deductions. These are similar to the deductions claimed on a personal income tax return. For example, the estate can deduct reasonable amounts paid to executors, attorneys, and tax professionals. Additionally, the estate can deduct investment advice, safe deposit box rentals, postage, and travel expenses.

Depending on the size of the estate, there may be no tax due at all. The estate can also take a credit for tax paid by beneficiaries of the estate, if any. Finally, unused capital losses and net operating losses can pass to the beneficiaries.

Some estates are required to file a tax return because they exceed the estate tax exemption, which is currently 11.7 million dollars in 2021. The Form 1041 will also review prior lifetime gifts to determine if they reduced the estate’s exemption.

If the estate’s tax liability is known, the Form 1041 must be filed by April 15 of the year following the deceased’s date of death. However, if the estate is known to be below the threshold of needing to file a return, it can be filed at any time after the death of the deceased. The executor or trustee should check with the state tax agency to see what the deadline is for filing the return in the particular jurisdiction. It is important that the return be filed correctly so that any errors are corrected quickly and that there are no problems in obtaining the refund if any is owed. This is why it is often helpful to have a tax professional assist with the preparation of the return. Having the right guidance can save valuable time and resources in completing the estate’s tax return.

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