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Filing An Estate’s Tax Return: What To Know

Jerry Brown5-Minute Read
April 08, 2022

When a person dies, someone has to handle their estate, which often includes filing their final income tax or estate returns. If this is your responsibility, it can be challenging. Filing taxes requires focus, something you may have trouble doing during an emotionally difficult time. On top of that you, you may not know where to begin.

But gaining a basic understanding of how estate tax returns work can help you navigate the process. Here’s a simple guide that covers what you need to know about filing an estate tax return, including when you should file an estate income tax return, what IRS forms may be required, who’s responsible for filing them and how to file. This guide is just a starting point; please consult a tax professional for individual assistance filing.

What Is Estate Tax?

When a taxpayer dies and leaves behind a multimillion-dollar estate, the federal government and some state governments may collect an estate tax. It’s a tax on the deceased’s rights to transfer their assets to their beneficiaries. But since estates are allowed to exclude a large amount of its assets, few estates are required to pay estate taxes.

For instance, the 2021 federal tax exemption was $11.7 million, and the 2022 federal tax exemption is $12.06 million. This means that only estates that are worth more than these amounts can be required to pay federal estate taxes.

When Should You File An Estate Income Tax Return?

Estate tax returns are due the same day as individual federal and state returns. The estate income tax return can be filed up to 9 months after the deceased date of death. And if you need more time to file, you can fill out form 7004 to apply for a 6-month extension, although you must pay the estimated correct amount of taxes and request the extension prior to your original due date.

You’ll have to file an income tax return by completing Form 1041 for the estate if it generates $600 or more in annual gross income. Estate income is typically generated from stocks, bonds, savings accounts, rental property or a paycheck deposited into the deceased bank account after their death.

What’s more, you must also file an estate income tax return when a beneficiary is a nonresident alien. If you’re unfamiliar with that term, it simply means someone who isn’t a U.S. citizen and hasn’t passed the green card or substantial presence test.

Who Is Authorized To File An Estate Tax Return?

If the deceased identified someone to be an executor of the estate in their will, then that person is the one responsible for filing the estate tax return. But if they died without a will or the executor can’t or doesn’t want this responsibility, then the state will appoint someone to be a personal representative or estate administrator.

And if you’re a surviving spouse, you’re allowed to file a joint tax return with the deceased if you didn’t remarry before the end of the tax year.

Someone who manages the descendant's property may also qualify to file the estate’s tax return.

Types Of Estate Tax Returns You May Need To File

It’s possible that you may have to file more than one type of estate tax return on behalf of your loved one. Let’s take a look at three types of federal estate tax returns that could be required.

Final Form 1040

Form 1040 is completed by every U.S. taxpayer who files an annual tax return. You may need to file this form if your loved one earned income. Whether you need to file a final Form 1040 on behalf of the decedent depends on how much income was earned and the amount of federal taxes withheld from their paycheck.

The deadline to file this return is normally April 15 of each year, but this year’s deadline is April 18, 2022.

If you’re unsure whether you’re required to file this form on behalf of the deceased, consider using the IRS’ Interactive Tax Assistant or speaking with a tax professional.

Form 1041

Form 1041 is an income tax return for estates and trusts. As we discussed earlier, you’re required to fill out this form when the estate generates at least $600 in income, has taxable income or when a beneficiary is a nonresident alien.

The deadline to file this form depends on which estate tax year you pick: calendar or fiscal. If you choose a calendar tax year, you’ll have until April 15 of the following year to file this return. But if you choose a fiscal year, you can file the return up to 12 months after the descendant’s date of death.

For instance, if your loved one died on Nov. 10, 2021, and you chose a fiscal year for the estate return, the deadline would be Oct. 30.

Form 706

If your loved one left behind a multimillion-dollar estate, it may be subject to estate taxes if its value is greater than the federal estate tax exemption. Remember, the 2021 exemption was $11.7 million, and the 2022 exemption is $12.06 million per individual.

The due date to file Form 706 is usually 9 months after the person’s date of death, but you can apply for a 6-month extension if you need more time.

Deductions To Know When Filing An Estate Tax Return

Make sure you’re aware of deductions the descendant's estate may qualify for, such as:

  • Distributions to beneficiaries: If you’re required to distribute income from the estate, fill out Form Schedule B to figure out the amount the estate can deduct.
  • Expert fees: You can deduct fees paid to an attorney, tax preparer or accountant.
  • Executor’s fees: Fees paid to an executor for handling an estate’s affairs are deductible.
  • Charitable contribution: If the deceased leaves property to a charity, its fair market value – a reasonable price a seller would purchase the property for on the open market – may be deductible.
  • Medical expenses: If you itemize deductions, you can deduct medical expenses that exceed 7.5% of the adjusted gross income on the descendant’s federal estate tax return.
  • Debt: You may also deduct mortgage or other types of debt, like credit card debt to reduce estate taxes.
  • Exemption deduction: You’re allowed to deduct $600 when calculating an estate’s taxable income.

How To File An Estate Tax Return

The first step is gathering the deceased’s financial records and personal information, such as bank statements, retirement account statements, W-2s and Social Security number. If you don’t know where to find this information, consider requesting a transcript of their previous tax return from the IRS by submitting Form 4506-T.

Once you’ve gathered the necessary documents and information, you can use it to fill out the deceased final Form 1040. If you’re filing a paper return, write “DECEASED,” along with the descendant’s date of death and name across the top of the form.

Before you file Form 1041, you’ll have to apply for a tax identification number, also known as an employment identification number, for the estate.

You can file these returns, along with an estate tax return (if necessary) via mail or online using tax software. If you need help, consider hiring a tax professional

 

The Bottom Line

Filing an estate tax return can be difficult, especially while you’re grieving the death of a loved one. But by learning how the process works, you’ll be better prepared to handle this responsibility.

You’ll likely need to file Form 1040 if your loved one earned income during the tax year. And you’ll have to complete Form 1041 if the estate generates $600 or more in income, earns taxable income or when a beneficiary is a nonresident alien. Form 706 only applies to a few extremely large estates.

If you need help preparing or filing an estate tax return, consider reaching out to an estate tax professional. To read more articles on personal finance matters that could affect you, visit our financial Learning Center.

Jerry Brown

Jerry Brown is a personal finance writer based in Baton Rouge, La. He's been writing about personal finance for three years. Financial products he enjoys covering include credit cards, personal loans, and mortgages. Jerry was nominated for a Plutus award for best social media for personal finance in 2020.