What are my tax responsibilities after I die?
When a taxpayer dies, there are different tax responsibilities at the federal and state level. There are some similarities for federal and state tax purposes, but there are differences in some areas such as filing requirements.
Upon death, the deceased taxpayer’s tax year ends for income tax filing purposes and a new entity emerges for tax purposes which is called the estate. At the federal level, it is necessary to complete certain forms. There are four specific tax forms that apply to deceased taxpayers. Not all deceased taxpayers will have to file all four. Some taxpayers may only have to file one. Which forms must be filed is determined by the deceased taxpayer’s income, size of the estate, and the income of the estate. These four forms are the final form 1040 federal income tax return, form 1041 federal fiduciary income tax return for the estate, form 709 federal gift tax return, and form 706 federal estate tax return. To understand which filing requirements may apply to and the tax consequences, it is strongly advisable to consult an attorney specializing in trusts and estates.
At the state level, it is the responsibility of the estate’s executor or administrator, also known as personal representative of the estate, to file a state income tax return for the deceased taxpayer and for the estate during the probate period. Taxpayers should carefully choose the personal representative for their estate as he or she will be responsible for completing many tasks and filing several documents including income tax returns. It is the personal representative’s duty to file all estate tax, inheritance tax, and gift tax returns. Not all states require these returns so it is best to consult an attorney who can advise you on which returns need to be filed in your specific state.
Laws governing the taxation of estates widely vary based on the state you live in and the size of your estate. For example, most states do not impose gift, estate, or inheritance taxes on small or medium-sized estates. Other taxes that the personal representative will have to address during the probate process include personal property tax, real estate tax, business tax, and some states might have other special taxes. At the time of death, if the taxpayer had any unpaid or disputed taxes for the years prior to year of death, the personal representative is also required to address those issues.