When Is an Estate Tax Return Required?

After losing a loved one, responsibilities can quickly pile up during a time when you’d like to focus on grieving. Unfortunately, taxes don’t disappear when someone passes. If you’re the executor of your loved one’s estate, you’ll be responsible for filing a tax return and paying any balance due to the Internal Revenue Service. If their estate is valued over a certain threshold, you’ll be responsible for filing a regular return and a complex return called an estate tax return. Here’s what you need to know about who needs to file these returns and how to file them.

A financial advisor can walk you through the tax requirements of an estate plan.

When Is an Estate Tax Return Required?

An estate tax return is required if the gross value of the estate is over a certain threshold. For individuals who passed in 2023, the threshold was $12.92 million.

Almost anything belonging to the deceased with a tangible cash value is included in the value of the estate. Common items that will be considered in the computation for the gross value of the estate can include:

• Retirement account balances
• Non-retirement account balances
• Real Estate holdings
• Stocks
• Bonds
• Investment Properties
• Ownership shares in a business
• Vehicles
• Art collections
• Insurance
• Farms

The IRS will also consider lifetime gifts made by the deceased when determining the estate’s value for estate tax return filing purposes. For example, if your loved one gave away $10 million in their lifetime and their estate at their passing is only worth $5 million you’d still be responsible for filing an estate tax return.

When Is an Estate Income Tax Return Required?

If the estate generated over $600 in income after your loved one’s passing and before the estate is settled, you’ll also be required to file an estate income tax return. Many estates of this size generate at least some income from interest, dividends or other sources. If you’re required to file an estate tax return, you’ll likely need to file an estate income tax return as well.

The estate income tax return is filed on IRS Form 1041. It will ask you questions about:

• The income, deductions, gains and losses of the estate
• The income that is currently being held or distributed to beneficiaries.
• The income tax liability of the estate.
• Employment taxes (if any) on wages paid to household employees.

How to File an Estate Tax Return

Estate tax returns are due nine months after your loved one’s passing, but extensions are common. Just like with a regular income tax return, even if you get an extension, any taxes due are still due on the original nine month deadline. If you fail to pay the estate tax due, the IRS may charge you penalties and interest on the amount owed.

Estates this valuable are typically complex to file returns for. It will likely take you longer than the initial nine months to gather the documents needed to start a return. This makes it a good idea to file for an extension as soon as possible.

The state tax return itself is filed on IRS form 706. While you technically can file this form yourself, it is highly advisable that you seek professional assistance.

When this much money is involved, you’ll want a team around you to ensure you aren’t making costly mistakes with your loved one’s estate. Work with a CPA to ensure that you’re claiming every deduction possible. Find a financial advisor to help you determine which assets are best to liquidate to pay the estate taxes due.

If the estate has holdings without an account balance, you’ll also need to hire a third-party appraiser. This appraiser will be able to place a value on intangible assets like real estate holdings, family businesses and farms.

Who Is Responsible for Paying Estate Taxes?

Federal, state and local taxes, as well as any other outstanding debts all come out of the estate itself before the assets of the estate go to beneficiaries. Assets are split following the guidelines set in the trust or will of the deceased. If there were no arrangements made, then allocations to beneficiaries will be determined by the probate court judge.

The person responsible for making sure all returns are completed and taxes are paid is generally the executor of the estate. If a trust was created, then the trustee is usually the one responsible. The estate taxes are not paid from the trustee or executor’s personal assets, but from the assets of the estate. If the estate taxes are not paid, then the IRS may place a lien against the estate and seize its assets.

What About State Estate Tax Returns?

There are 17 states and the District of Columbia that have estate or inheritance taxes, or both. Connecticut, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont and Washington all have some form of estate or inheritance tax. Each state has its own threshold and rules for estate taxes and inheritance taxes.

If you are in one of these states, contact a local CPA to see if you’ll have to file a state estate tax return, an inheritance tax return, or both.

Bottom Line

Very few estates need to file an estate tax return. While you’ll most likely have to file an income tax return for your loved one, you probably won’t have to file an estate tax return for their estate. If the value of the estate is significant enough to be required to file an estate tax return, you’ll want to hire professional assistance.

Tax Planning Tips

• A financial advisor can help optimize your financial plan to lower your taxes. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Before you think about the estate tax or the gift tax, you’ll probably have to think about your retirement taxes. Use SmartAsset’s retirement tax calculator to estimate how much you’ll owe based on the state in which you live.

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