If you have been named as the executor of an estate, you will likely have to jump through a number of hoops before the probate process is complete. One of the many steps to closing an estate is paying any outstanding taxes owed by both the estate and your loved one (called the decedent).
How Are Taxes Paid During Estate Administration?
There are different taxes that can be levied when a loved one dies, most commonly estate tax and income tax. The federal estate tax, sometimes called the "death tax,” has historically been criticized as unfair to families whose assets were mainly property (such as farmers). However, the federal estate tax today applies to just a fraction of wealthy taxpayers—affecting approximately 2,000 estates per year.
That said, you may be responsible for:
- Federal tax on the estate. Many people who have enough assets to warrant federal estate tax have implemented ways to avoid or minimize the tax in their estate plans, such as making gifts to family members and creating a trust to avoid probate. However, the estate may owe federal estate tax if its assets total $11.7 million or more (as of 2021) or are still earning interest or dividends.
- Federal income tax on beneficiaries. Heirs usually do not have to pay federal income taxes on inheritances of cash or property. However, if the executor does not file a tax return for the estate before distributing inheritances, the beneficiaries could end up owing tax. In some cases, passing the tax liability on to the heirs may be done intentionally, as the estate could be in a higher tax bracket than the individual receiving the inheritance.
- Distributions from IRAs. Beneficiaries who have been given control of an individual retirement account (IRA) do not have to pay taxes immediately, but any distributions from the retirement account withdrawn over time may be taxed as income.
What Are My Responsibilities as Estate Administrator?
You will have to file all necessary tax forms and open a checking account in the name of the estate to pay any estate expenses. If you do not follow proper procedures for receiving and distributing estate property, the IRS can hold you personally responsible for tax underpayments, penalties, and interest. For this reason, it is always a good idea to have a New York estate administration attorney look over your tax forms before you file.
Some forms you may be required to file include:
- Form 1040. It is your responsibility to file your loved one’s final tax return for all taxes from January 1 though through the date of death. In most cases, the return is due on April 15 of the year following the year of death. If the person has a surviving spouse, the final 1040 can be filed as a joint return using the decedent’s income and deductions up to the date of death and the surviving spouse’s income and deductions for the entire year.
- Form 1041. Not only do you have to file the decedent’s final income taxes, but you will also need to file an income tax return for the estate itself. Form 1041, U.S. Income Tax Return for Estates and Trusts, covers any income generated by the decedent’s holdings after death. This form is only required for estates with an annual gross income above $600, so it doesn’t apply to small estates and those that can be closed before $600 worth of income accumulates.
- Form 706. The federal estate tax return is filed on Form 706, United States Estate Tax Return, and only applies to estates valued at $11.7 million or more (as of 2021). However, estates below the threshold may end up owing tax if the decedent made sizable gifts to relatives and friends prior to death. If so, the excess over the threshold may be subject to a 40% federal estate tax.
- Form 56. You will have to notify the IRS that you will be handling all tax matters on behalf of the estate and the decedent using Form 56, Notice Concerning Fiduciary Relationship.
- State tax forms. New York imposes a state estate tax on larger estates, starting at 3.06% for the first $500,000 and reaching 16% for estates over $10.1 million. New York estate tax may be levied when someone dies as a resident of the state, or if someone dies owning property that is physically located in New York.
The experienced probate attorneys at Landskind & Ricaforte Law Group can help you through tax filings for a deceased loved one and determine if there are ways to reduce overall tax liability. Contact us today through our online form to learn how we can help.