Tax Responsibilities After Someone Dies (Part 2)

News from RWHSG

Posted by Kim Chen on July 15th, 2014

After a loved one dies, there are a number of tax requirements that must be taken care of. In a previous article here, we described one of the first tax-related duties of an estate executor or administrator — making sure the decedent’s final income tax return is filed for the year of death.

More Miscellaneous Details

•If an estate must file income tax or estate tax returns, a federal employer identification number (EIN) must be obtained from the IRS.

•You should open a checking account in the name of the estate with some funds transferred from the decedent’s accounts. The bank will ask for the estate’s EIN. Use the new account to accept deposits from income earned by the estate and to pay expenses – such as outstanding bills, funeral and medical expenses, and, of course, taxes.

•Finally, state income tax returns and perhaps a state estate tax return will have to be filed.

Here are the rest of the tax-related duties:

File the Estate’s Income Tax Returns.

Immediately after death, the decedent’s estate may take over ownership of some or all of the decedent’s assets. If so, the estate will be taxed on its income under complicated IRS guidelines applicable to trusts.

Important distinctions: We are talking about income taxes for the estate, not the final income taxes of the decedent. And the federal estate tax is an entirely different subject.

Small estates (with gross income under $600) aren’t required to file income tax returns. If you are in charge of an estate that must file, get professional help to assist you with this onerous chore because the tax law is very complex.

File the Estate’s Estate Tax Return.

The federal estate tax return is filed on Form 706. Assuming the decedent did not make any sizable gifts before dying, no estate tax is due, and no Form 706 is required, unless the estate was worth more than $5.34 million in 2014 (up from $5.25 million for 2013). By sizable gifts, we mean in excess of $14,000 to a single recipient for 2014 (unchanged from 2013). If sizable gifts were made, the excess over the $14,000 threshold is added back to the estate to see if the federal estate tax exemption limit has been surpassed.

Form 706 is due nine months after death, but the deadline can be extended up to six months. Remember: While life insurance proceeds are generally free of any income tax, they are usually included in the decedent’s estate for estate tax purposes — even if the money goes directly to policy beneficiaries. In fact, life insurance proceeds are the most common cause of unexpected estate tax bills. One other very important point: assets inherited by a surviving spouse are not included in the decedent’s estate, as long as the surviving spouse is a U.S. citizen. This is called the unlimited marital deduction privilege and it’s the most common reason why many large estates don’t owe any federal estate tax.

If you are the executor of a substantial estate, consult with your attorney even if you think no estate tax is actually due. If you are correct, the cost to confirm your conclusion will be minimal. If you are wrong, filing Form 706 is generally a complicated matter and you may need professional assistance. Also, an experienced estate attorney may be able to find perfectly legal ways to substantially reduce the tax bite or even make it disappear.

Please contact our Naples CPA or Marco CPA to learn more about this.