How to Prepare a Final Estate Tax Return

The death of a loved one can bring on a flurry of administrative tasks, including filing an income tax return for the deceased person’s estate and calculating any taxes that are owed. Although this may seem daunting, a probate attorney can help the executor of an estate or trust with these tasks, including determining which forms are required and when they’re due.

The final estate tax return, or Form 1041, is an Internal Revenue Service (IRS) form that is used by estates and trusts to report their income and deductions. The executor of the estate or trust files this form under the entity’s name and taxpayer identification number. Some states require an additional state-level estate tax return.

There are several different types of income that can be generated by an estate or trust. Common examples include rents from a deceased person’s real estate, salary that wasn’t paid to the deceased before his or her death, earnings on investments or savings accounts, and any other assets that generate income in the year after death. However, assets that passed straight to a beneficiary and weren’t held by the estate or trust are not included in Form 1041 (instead, those funds should be reported on a separate form, Schedule K-1).

For the first few months after a person’s death, the amount of income earned by an estate is usually quite low. This is because the tax basis of most assets is stepped up to their date-of-death value, which means that any gains or losses on those assets won’t be taxable. As the year progresses, however, the estate’s income can increase significantly. The amount of taxes owed will also vary depending on the size of the estate, which assets are sold and when.

When preparing the final estate tax return, the executor of an estate must also consider any expenses that were incurred in the process of settling the estate. These can be as simple as fees for a trustee or executor and as complex as legal, accounting and costs to maintain or sell assets. In addition, the estate can deduct charitable donations made by the deceased.

Using a software program such as Nolo’s TaxSlayer Pro, the user can start by entering all the entity’s income into the Income Menu, including the capital gains and losses. Upon exiting this menu the user will then move to the Schedule D, Capital Gain/Loss Allocation Menu and complete the necessary transactions.

Next the user will move to the Deductions Menu and enter any deductible items that were claimed by the entity (such as an estate tax or generation-skipping transfer tax deduction). Once the user has entered all the applicable deductions, they can return to the main menu of the Form 1041. At this point, the software will apply the appropriate exemption amounts for the entity and calculate the total taxable income. This can then be confirmed and the return filed.

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