Benjamin Franklin famously said,"In this world nothing can be said to be certain, except death and taxes.” And while death puts a stop to many things, taxes is not one of them. In this blog post, we will take a look at when your estate has to file a tax return.
Let's clear up a few confusing issues first. Just because your estate may have to file a tax return doesn't mean that your estate is subject to estate tax. Estate tax and income tax are two different things, and for the purposes of this post, we will be talking about an income tax return for your estate. (Estate tax, by contrast, is levied only on the very wealthiest estates. If your assets total less than $11,180,000 in 2018, you probably won't have to worry about it.)
Unlike estate tax, many estates need to file an income tax return. At the moment of a person's death, their estate becomes a separate legal entity from them. If you are the personal representative of an estate, you will probably have to file a final income tax return for the deceased person (decedent) for the year in which they died, and also an income tax return for the estate.
For example, if your Uncle Bartholomew died on June 5, 2018, he would likely have income that would require you to file an income tax return for him for tax year 2018. If Uncle Bartholomew was the owner of an occupied rental property when he died, then the income from the property after his death would belong to the estate. You would then have to file an income tax return for the estate for every tax year in which the estate was open.
As executor, you may choose whether to use a fiscal or calendar year for the estate's accounting period. If you choose fiscal year, the estate's tax year begins on the date of the decedent's death, or June 5 in this case. If you choose the more familiar calendar tax year, the end of the tax year would be the last day of the year in which Uncle Bartholomew died, or December 31, 2018. Either way, you will need to obtain a Tax ID number for the estate in order to file a return.
Not every estate has to file an income tax return, but many do. As executor, you would have to file a Form 1041, Income Tax Return for Estates and Trusts, if the estate had either gross income of $600 or more for the tax year, or one or more beneficiaries is a nonresident alien. Depending on the circumstances, you may need to file additional forms.
We tend to think of income primarily as something that comes from work, and an estate obviously doesn't have a job. But, of course, there are other kinds of income, like the rents from Uncle Bartholomew's income property, interest on the estate bank account, or salary that was earned by, but not paid to, the decedent before they died.
As you can imagine, it is fairly easy for an estate to accumulate gross income of $600. Once that threshold is crossed, when do you, as executor, have to file an income tax return on behalf of the estate?
The filing deadline for an estate income tax return depends on the tax year for the estate. The tax year must end on the last day of the month. The estate income tax return is due on the fifteenth day of the fourth month after the end of the tax year. For Uncle Bartholomew, if the tax year began in June, when he died, it would end on May 31 of the subsequent year; September 15 would be the fifteenth day of the fourth month following that date. If you, as executor, decided to go by calendar year, the income tax return would be due on April 15. If the due date would fall on a weekend, the tax return is due on the next business day.
Even if you are required to file an estate income tax return, the estate may not be required to pay income tax. Like living people, estates can claim deductions, including fees paid to the executor out of estate funds. (Of course, you must then report those fees as income on your own tax return.) If the estate does owe income tax, it will be paid out of estate funds.
If any of this seems daunting, the best advice is to consult an experienced estate planning attorney for guidance or assistance filing estate income tax returns. Because the services of an experienced attorney are a benefit to the estate, those fees are paid out of estate funds as well.
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