Proper handling of an estate helps ensure that the beneficiaries will consider you a responsible overseer of their inheritance. As executor, one of your responsibilities is to deal with the final tax issues of the estate.
The exact tax returns filed vary according to the nature of the estate. Still, some tax issues are common to almost all estates.
The final tax return
Many individuals file an annual income tax return. Even if someone has died, that person may still owe income taxes or other obligations to federal and local governments. As executor, you will file a final tax return on behalf of the decedent for the year the decedent had died.
The estate income tax return
After someone dies, their assets go into their estate. However, their assets could continue to generate revenue before you pass them to beneficiaries. According to the IRS, if an estate generates an annual gross income of over $600, the executor must file a Form 1041. Depending on the assets, you might also file quarterly estimated taxes.
Extended or unfiled tax returns
Do not assume that the decedent had completed all returns for previous years. Individuals may secure an extension for a return, so you will be responsible for completing any returns still on extension.
However, it is common for people in their last years of life who are sick or infirm to miss filing one or more tax returns. If you are taking over the estate of someone who suffered incapacitation or prolonged illness, consider checking for any delinquent filings.
Federal estate taxes
In some cases, the federal government levies estate taxes on the transfer of estate property to beneficiaries. Estates subject to the federal estate tax must meet a certain threshold determined by the IRS, by an examination of the total value of the estate. As of 2024, the threshold amount is $13,610,000.
Another possible estate tax is the generation-skipping transfer tax. The GST applies to estates in cases when the decedent attempts to transfer assets directly to descendants who are in a lower tax bracket. Also, the descendants are at least two generations below the donor, and the value of the transfer exceeds the GST tax exemption amount.
Knowing possible tax duties can help executors prepare for the important responsibilities that lie ahead, and help beneficiaries feel confident the estate will not face litigation over unpaid taxes.