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What are the estate executor’s responsibilities for final tax returns?

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The Executor Adviser from Executor.org

The Executor Adviser is an advice column created by Executor.org for Legacy. Executor.org's experts aim to help readers with questions about executorship and provide comprehensive, free online resources to guide executors through this complex process.

For many executors, filing tax forms for the deceased is a confusing, stressful challenge.

First off, there are unfamiliar forms and non-traditional deadlines. Second, there are often multiple options to consider and some can significantly change the amount of taxes that must be paid.


Protect your family from worry — consider pre-planning a funeral


It’s typically a great decision to consult with an accountant to make sure your tax strategy for the deceased is a solid one. However, it’s also a great idea to understand a bit about the potential taxes so you can save money on accountant fees and make educated decisions.

According to our accounting experts at Executor.org, below are several types of taxes you might have to file on behalf of the deceased and/or their estate. (Grab a cup of coffee or a double-shot of espresso; this important information is also, unfortunately, a little dry).

 

1. Personal Income Tax

In most cases, you’ll be filing state and federal income tax returns for the deceased. This is the traditional Form 1040 that is typically due on April 15. There are exceptions, however, such as if the deceased’s income stayed below a certain amount. The maximum amount that can be earned without being required to file tax forms can vary based on age, marital status, etc. The IRS has a helpful, interactive tool you can use to determine if taxes are owed.
If the deceased was married at the time of their death, you should also consider whether to file a joint return.

Should You File a Joint Return?

If the deceased is survived by a spouse and that spouse does not remarry during the year, a joint tax return can be filed. This return will include any income and deductions for the deceased prior to the date they died, as well as the surviving spouse's income and deductions for the entire year.

Some potential advantages of filing a joint return:

  Filing jointly might reduce the combined tax bill since the surviving spouse’s tax year continues as usual. This is because filing jointly gives you flexibility in terms of when you can file. This allows you to potentially accelerate or delay income and deductions so that you can get the best tax rate.
  You can use one spouse's excess deductions against the income of the other spouse.
  You can boost the IRA contribution limit. A surviving spouse can make an IRA contribution to their spousal IRA based on the deceased’s income prior to death.
  You can carryover any net operating losses, capital losses, and passive activity loss of the deceased to offset the income of the surviving spouse.
  Tax credits are generally larger on a joint return.

Some potential disadvantages:

  The deceased’s estate and surviving spouse are together liable for any tax, interest and penalties due on the joint return.
  Filing a joint return can negatively impact the amount of the deductions you can take that are subject to AGI limits (for example, medical and charitable) since AGI is based on joint income rather than separate income.

 

2. Estate Income Taxes, Federal and State

If after death the deceased receives income, this will technically be considered earnings of the deceased’s estate. As such, you might have to file an income tax return for the estate in addition to the personal income taxes you file on behalf of the deceased. You can file these taxes based on any fiscal year, meaning the “year” could be any 12-month term, such as April to April, November to November, etc. It does not have to be a calendar year that ends on Dec. 31. Whatever end date you choose, taxes must be filed three and one-half months later.

 

3. Federal Estate Tax

Most people will not need to file a federal tax return because they don’t have enough assets at death. In 2018, an individual can leave up to $5.6 million to beneficiaries before federal estate taxes will be charged. If the deceased’s estate has more than $5.6 million in assets, a federal tax return will be due nine months after their death.

 

4. State Estate Tax

About half of the states in the U.S. impose a separate estate tax. Some follow the same guidelines as the federal government and only charge taxes on assets over $5.6 million for an individual. Others, though, will impose taxes on smaller estates.

 

5. State Inheritance Tax

Some states impose inheritance taxes but the federal government does not. This can at times be confusing because this tax is not paid by the estate. This tax is paid by the beneficiaries who receive inheritances. In general, surviving spouses and children will pay a lower rate than beneficiaries who are not related or are more distantly related to the deceased. In some cases, spouses and children may be completely exempt from paying any inheritance tax.

While the estate is not responsible for paying these taxes, as executor you will most likely have to file an inheritance tax return as a beneficiary. In some cases, the probate judge also might not allow the estate to be settled until receiving proof that all beneficiaries who owed taxes have paid them.

 

6. Trust Income Tax

If you happen to be an executor and also a trustee of a trust that was created by the deceased, you will likely be required to file state and federal income tax forms if the trust earns income. The income minimum in this case can vary too, so you’ll want to check state and federal guidelines.

Confused yet? We know you probably are unless you’re an accountant who does this work every day. As we said at the beginning, handling taxes and tax forms is one of the toughest duties of an executor. But just remember, Executor.org can help you and there are plenty of excellent accountants out there too.

Have a question about executorship? Get an answer by sending an email to [email protected].


About the Author: Patrick O'Brien is CEO and co-founder of Executor.org, a free, comprehensive online resource that helps executors manage their responsibilities and duties in this complex role. The free tools include a helpful step-by-step interactive guide for executors and invaluable tips on everything from planning a funeral and keeping beneficiaries happy to dealing with grief and managing estate assets.


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