For tax purposes, the government treats the estate of a deceased person as a separate legal entity. If you are the executor of an estate, you will need to file separate tax returns on behalf of the deceased and the estate. This article goes over the different taxes executors must pay on behalf of the estate, when to file these taxes and other requirements.
Filing the Final Income Tax Returns
Generally, an executor prepares the final income tax returns for the deceased person. The executor files the final federal and state income tax returns as if the deceased person was still alive using IRS Form 1040 and the required tax forms of the state in which the deceased lived. Executors report income generated up until the date of death. The executor may list credits and deductions for which the deceased qualified.
Filing an Income Tax Return for the Estate
The executor may have to file an income tax return for the estate, known as a fiduciary return, in addition to the one filed on behalf of the deceased. The executor must file a federal income tax return for the estate (IRS Form 1041) if the estate generated $600 or more in gross income for the tax year or has a beneficiary who is a nonresident alien. Estate income is generally generated through sources such as: salary unpaid to the deceased before death, interest on an estate bank account or rent from real estate property included in the estate.
The executor files the estate’s first income tax return at any point up to 12 months after the date of death. Depending on how quickly the executor settles the estate, there may be only one income tax return required for an estate. However, if the estate is not settled within 12 months after death and the estate generates more income, the executor must file another income tax return for the estate the following year.
There are standard deductions that estates receive on an income tax return, for instance:
- Automatic $600 exemption for all estates
- Executor fees and estate administration costs
- Fees paid to attorneys, accountants or tax preparers
- Income from the estate paid to beneficiaries
However, you should check with your accountant and/or tax advisor to confirm.
Filing an Estate Tax Return
As of 2017, estates valued over $5.49 million must pay a 40% federal estate tax rate. The government does not tax the gross estate value, but the taxable estate. Generally, you can calculate the estate tax liability by taking the gross estate value and then subtracting allowable deductions such as funeral expenses, debts owed by the estate, estate administration expenses, state estate tax (where applicable) and charitable deductions. However, you should check with your accountant and/or tax advisor to confirm these deductions. Additionally, twelve states and the District of Columbia currently levy their own estate tax.1 Finally, federal estate tax returns (IRS Form 706) and the corresponding tax are due within nine months after the date of death.
If you are an executor and need guidance managing finances for an estate, contact Fifth Third for assistance.