Serving as the executor, or the personal representative, of an estate can be a demanding job. Just identifying and creating an inventory of the estate’s assets alone may be quite time consuming, which is only one piece of an executor’s duties. There may be life insurance claims to file, appraisal(s) to arrange, property to manage, debts to collect and final bills to pay.
In additional to those responsibilities, the executor of the estate must address tax concerns. Here are three important tax duties and considerations every executor should know.
Tax Responsibility #1: The decedent’s final income tax filing.
An executor files the decedent’s (person who passed away) final federal and state (if applicable) income-tax returns covering the period from January 1 through the date of death.
Generally, the decedent’s surviving spouse may file a joint return, but that’s not always the best choice. In some cases, for example, it may be preferable to file a separate return to potentially increase the amount of medical expenses that may be deductible.
Tax Responsibility #2: The estate’s income tax filing.
An estate often continues receiving income (through interest, dividends, etc.) from the decedent’s holdings before the estate is settled and all assets are distributed to beneficiaries. The executor must file a federal income tax return on behalf of the estate if the estate’s gross income in any year is $600 or more, or if any beneficiary is a nonresident alien.
Whether to use a calendar or fiscal year for tax reporting purposes is one of the important decisions an executor has to make. Choosing a calendar or fiscal year for the estate’s income tax can have tax implications, so speak with a tax professional if you have questions or concerns.
Tax Responsibility #3: Estate-tax filing.
Don’t confuse the “estate’s income tax” with “estate tax.” A federal estate tax filing may be required if the value of the decedent’s gross estate at death, minus certain lifetime gifts, is more than the basic exclusion amount ($5.49 million for 2017). A smaller estate also may require a filing to transfer any unused exclusion amount to the decedent’s surviving spouse. If an estate tax filing is required, the executor has several choices to make. For example, it is possible to value the estate on an “alternate valuation date” instead of the date of death. With fluctuating asset values, choosing the best date for estate valuation could be important for maximizing tax savings.
The tax decisions an executor makes can affect what is left for distribution to the estate’s beneficiaries. That is all the more reason to consult a tax professional if you are ever called upon to serve as an executor. If you need help along the way, contact a Fifth Third estate settlement specialist today.