Taxes

WHAT TYPES OF TAX RETURNS IS THE ESTATE REPRESENTATIVE REQUIRED TO FILE

Benjamin Franklin once said “Nothing is more certain in life than death and taxes.   When someone dies, the estate representative assumes the responsibility to file and pay the decedent’s final income tax returns.   In addition, the estate representative must determine if the value of the taxable estate requires the estate to pay a federal estate tax.

The tax preparation fees and any taxes due should be paid from the estate. Most important, the estate representative must make sure the estate has the money to pay for any tax obligations before distributing any of the estate to the beneficiaries.   If the estate representative distribute assets before paying any taxes due, the estate  representative may be personally liable for the payment of the income or estate taxes.

• What type of personal tax returns need to be filed on behalf of the decedent?
• Is the estate required to file a Form 706 federal estate tax return?

Q. What types of income tax returns need to be filed on behalf of the decedent.

A. When someone dies, two different types of income tax returns may need to be filed.   One reports income up to the time of death.   Another reports income after the decedent died.

1040 Federal tax return. A federal 1040 tax return must be filed that reports the income the deceased received before he died. Wages and other income will have been recorded and reported using the decedent’s social security number.

If the decedent was married, the surviving spouse may still file a joint return.  The joint return will use the SSN of the deceased.   The joint return will include the deceased’s taxable income until the date of death as part of the 1040 tax return. The surviving spouse can sign the tax return on behalf of a deceased spouse.  If there is an estate representative, the estate representative must also sign the tax return.

If the decedent was not married, the estate representative must sign and file and the 1040 tax return.

Federal Form 1041 Tax Return.Form 1041 is the U.S. ncome tax return form for estate and trusts.   Like a personal Form 1040 tax return, the Form 1041 reports income and expense of a trust or income received by the estate after the death of the decedent.

When someone dies, their social security number dies with them.  The estate must apply for a new federal tax identification number from the IRS, referred to as an Employment Identification Number (EIN).   Once the EIN is available, the estate representative should complete the necessary forms to change the social security number on file with  brokerage firms, banks and other entities the estate will receive income from or pay money to to the estate EIN.

Q.   Why would an estate have to report income and pay taxes?

A.   If probate is required, the assets of the deceased cannot be immediately distributed to the beneficiaries

The assets of the deceased are not ready to be distributed to the beneficiaries.
The Form 1041 tax return, identified by the EIN assigned to the estate, muts be filed by the personal representative, who reports the income and expenses, and pays any taxes due.

Q.   How do you get a new tax identification number for the decedent?

A. The new tax identification numbers is called an Employee Identification Number, commonly referred to as an EIN.

Q. Why would a trust need to complete a 1040 tax return?

A. Before the decedent died, trust income and trust expenses were reported using his or her social security number.  When a new trust is established upon the decedent’s death, the trust must apply for a tax identification number.

Q. When does a Form 1041 need to be filed?

A.The filing dates for a Form 1041 ta return is the same as the dates for filing a Personal Form 10401.  It must be filed by the decedent’s representative on April 15 following the year of death and report income earned after the death.

Q.Does the estate or the trust report income such as dividends or income to the beneficiaries?

A.Sometimes, the instructions in the will or the trust request the estate representative or the trustee to distribute income generated by the estate or trust assets to certain beneficiaries.

When this happens, the person completing the Form 1040 must complete another tax form referred to as a K-1, Beneficiary’s Share of Income, Deductions, and Credits.   The K-1 allocates the portion of income received by the trust or the estate that is distributed to each beneficiary.

The beneficiary receiving the K-1 must report income identified on the K-1 as income on his or personal 1040 tax return for the year it is received.

The trust must file a Form 1041 tax return even if it distributes all income to the beneficaries.  Part of the 1041 return will identify the K-1, including the name of the beneficiary, his or her social number and the amount distributed.

Most estates and trusts distribute the income to the beneficaries because the tax rates for living individuals are generally lower than income tax rates charges to estates

The estate representative will request brokerage firms, banks, or other organizations paying dividends, interest or other income to record such income using the EIN assigned to the estate of the deceased. Any income the estate receives must be reported on Form 1041.  The 1041 will use the EIN number as its tax identification number. The estate representative will sign the form as “John Smith, estate Representative of Jack Brown, deceased.” The Form 1041 has the same filing dates as the Form 1040.