An executor or other person administering an estate must consider different factors in regards to taxes. The most important of these factors involves when the estate must file income taxes, which requires the use of IRS Form 1041. Failure to properly report income taxes can result in tax penalties to the estate.
When to Use 1041
An estate must pay income taxes on any annual income above $600 earned after the date of death. If an estate exists for multiple years before the distribution of all of the assets of the estate, the estate must file in each year that the estate earns income of $600 or more. Some potential sources of taxable income for an estate include rent receipts and investment and business income. To report income earned before death, the estate should file the appropriate 1040 form for the deceased person from the first day of the year until the date of death.
Tax Filing Year
An estate tax year begins on the day after the death of the decedent. For example, if a person dies on May 20, the individual's personal income tax return will cover the period from Jan. 1 to May 20, while the estate income tax return will cover from May 21 to Dec. 31. However, the estate does not have to file taxes from the date of death until the end of the year. The executor can choose a different period ending on the last day of the month up to 12 months after the decedent died. For example, if the person died on May 20, the last day that the estate can use for the tax year is April 30 of the next year.
Income Vs. Estate Tax
Executors and others involved with settling an estate should understand that there are two different potential taxes that an estate may owe. One potential tax is income tax, which requires the estate to file a 1041; the other tax the estate may owe is the estate tax, which requires a different form. Income taxes are taxes paid on the income earned by the estate. Estate taxes are taxes paid on large estates, generally in excess of $5 million for an individual or $10 million for a couple.
If an estate qualifies to pay federal income taxes, it likely will have to pay state income taxes as well. Though the exact form varies by state, the form will require similar information as the 1041. Many states also have an estate tax. While calculating estate income taxes can be complicated, there are numerous tax software programs that can help to simply the process. Estate executors also can use the services of an accountant or tax professional to complete the proper tax forms.
- Internal Revenue Service: Instruction for Form 1041 and Schedules A, B, G, J and K-1
- Schlabig & Associates: Do You Need to File an Estate Income Tax Return (Form 1041)?; Debbie Patrone; October 2010
- National Technical Information Service: Income Tax Return
- National Technical Information Service: Comprehensive Example
- Vermont Department of Taxes: Individual Income