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How are taxes handled in probate?
For federal and state tax purposes, death triggers two events:
(1) It ends the decedent's last tax year for purposes of filing an income tax return, and
(2) It establishes a new, separate entity for tax purposes: the "estate."
For Federal tax purposes, it may be necessary to complete and file one or more of the following, depending on the decedent’s income, the size of the estate, and the income of the estate:
(1) Final Form 1040 Federal Income Tax return.
(2) Form 1041 Federal Fiduciary Income Tax returns for the estate.
(3) Form 709 Federal Gift Tax return(s).
(4) Form 706 Federal Estate Tax return.
For state purposes, the Personal Representative (also called the Executor or Administrator) must file the appropriate state income tax return (assuming the decedent was required to do so while living) and any state income tax returns for the estate during the probate period. The Personal Representative must also file all estate tax, inheritance tax, and gift tax returns required by the state where the decedent lived. (In many states gift, estate, and inheritance taxes have been eliminated for most small and medium-sized estates.) The requirements for filing tax returns and paying taxes vary widely from state-to-state.
The Personal Representative needs to pay attention to other taxes in the probate process as well, such as local real estate and personal property taxes, business taxes, and any special state taxes.
The Personal Representative should also be alert to the possibility that there may be unresolved tax issues for the tax years prior to the decedent's death. |
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