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FILING ESTATE & GIFT TAX



When to File

There are two kinds of taxes owed by an estate: One
on the transfer of assets from the decedent to their
beneficiaries and heirs (the estate tax), and another
on income generated by assets of the decedent’s
​estate (the income tax). 


Estate Tax Return

Generally, the estate tax return Form 706 is due nine months after the date of death. A six month extension is available if requested prior to the due date and the estimated correct amount of tax is paid before the due date.

California Estate Tax Return No Longer Required


A California Estate Tax Return, Form ET-1 , was required to be filed with the State Controller's Office, whenever a federal estate tax return Form-706  is filed with the Internal Revenue Service (IRS). However, after January 1, 2005, the IRS no longer allows the state death tax credit; therefore, a California Estate Tax Return is not required to be filed for decedents whose date of death is after December 31, 2004. 


Do You Need to File an Income Tax Return for the Estate?

The executor must file a federal income tax return (Form 1041) if the estate has:

1) Gross income for the tax year of $600 or more, or
2) A beneficiary who is a nonresident alien.

What kind of income does an estate have? Common examples are rents from real estate in the estate, salary that wasn’t paid to the deceased person before death, or interest on an estate bank account.

If you promptly distribute all the estate assets to the people who inherit them, the estate may not have income, and you may not need to file an income tax return for it. For example, if the deceased person owned a house in joint tenancy with his spouse, and had payable-on-death designations on his bank accounts, those assets will pass immediately to their new owners at death. They won’t generate income for the estate.

Form 1041: The Estate’s Income Tax Return

The income tax return form for estates is IRS Form 1041. It’s also called a “fiduciary” return, because you file it in your capacity as executor of the estate. (An executor is a fiduciary—that is, someone who is entrusted with someone else’s money—and has a legal duty to act honestly and in the best interests of the estate.) The Form 1041 return is similar to the personal income tax return, Form 1040, that we all file every April 15. There’s a “Decedent's estate” box at the top the form, which you should check.

The executor of the estate is responsible for filing a Form 1041 for the estate. The return is filed under the name and taxpayer identification number (TIN) of the estate. On it, you’ll report estate income, gains, and losses, and will claim deductions for the estate. You don’t have to include a copy of the will when you file the return.

The Estate’s Tax Year

The estate’s tax year begins on the date on which the deceased person died. You, as executor, can file the estate’s first income tax return (which may well be its last) at any time up to 12 months after the death. The tax period must end on the last day of a month. If you file in any month except December, the estate has what’s called a fiscal tax year instead of a calendar tax year.

Deductions

All estates get a $600 exemption. You can also deduct:

Distributions to beneficiaries. If you are required to pay out the income on estate assets to beneficiaries, you can take a deduction for those amounts. To calculate the amount of the deduction, fill out Schedule B. The income distribution deduction determines the amount of any distributions taxed to the beneficiaries.

Executor’s fees. If the estate paid the executor, the amount can be deducted from the estate’s income. The executor must report the fees as taxable income on his or her own personal income tax return.

Expert fees. You can deduct reasonable amounts the estate paid to attorneys, accountants, and tax preparers.  

Expenses of administration. The amount you spend to wrap up the estate—to collect assets, pay debts, and distribute property to the people who inherit it—is deductible. You don’t have to conduct a formal probate to have deductible expenses of administration, but if you do costs are likely to include probate court filing fees, the cost of publishing probate notices in the local newspaper (as required by the probate court), and the cost of buying a bond (a type of insurance policy that guards against your misuse of estate assets), if it’s required.

Miscellaneous deductions. Some other expenses can be deducted if they exceed two percent of the estate’s adjusted gross income. Examples are investment advice, safe deposit box rentals, office supplies, postage, and travel expenses.

You cannot deduct medical or funeral expenses on Form 1041. You may be able to deduct medical expenses on the deceased person’s individual income tax return.

Forms for Beneficiaries

If you distribute income to beneficiaries, they are responsible for paying income tax on it. When you file the estate’s Form 1041, you must give each beneficiary a Schedule K-1 form, showing how much the beneficiary received during the tax year.

Paying the Tax

The executor is responsible for making sure that the estate pays any income tax due. The tax is paid from estate assets.