Daniel Mace, CPA, PA
It is said that the only certainties in life are death and taxes. That expression may ring particularly true to anyone who has served as the executor of an estate. Nearly all estates have to file an income tax return for the decedent, and the executor also may have to file one or more income tax returns and an estate tax return for the estate. Read on for more information related to these requirements.
The executor is responsible for filing the decedent's final income tax return (Form 1040 or Form 1040-SR). Because most individual taxpayers file on a calendar-year basis, the final tax year will typically cover the period from January 1 to the date of death. The final return is generally due on April 15 of the year following the date of death. An automatic six-month extension may be obtained by filing Form 4868 and paying any tax due with the extension.
The executor may file a joint income tax return with the decedent's surviving spouse, provided the spouse has not remarried by year-end. Filing jointly can offer certain tax advantages but may not be the best option in all cases. Estate Income Tax Return
The IRS considers the decedent and the estate to be separate tax entities. If the estate generates $600 or more in gross income, the executor is required to file an income tax return (Form 1041) for the estate. Before filing, the executor must obtain a tax ID for the estate.
The executor may elect to use a calendar or fiscal year for the estate. Careful consideration should be given to this decision because, in some cases, the executor may obtain additional tax deferral for a beneficiary by electing a fiscal year that ends after the close of the beneficiary's taxable year.
Because the estate tax exclusion amount is high -- $12.06 million for 2022 -- many estates will not owe any federal estate tax. The exclusion amount is typically adjusted for inflation every year. However, the exclusion amount is scheduled to drop to $5 million, as adjusted for inflation, in 2026.
Even where no estate tax is due because the exclusion amount is at the current high level, the executor may want to file an estate tax return if the decedent was married. That's because current law permits a married person's executor to make an election to pass the unused exclusion amount to the surviving spouse for eventual use on his/her own estate tax return.
In general, this "portability" election must be made on a timely filed estate tax return of the first spouse. Therefore, if there is any chance that the surviving spouse's entire estate (including the amount passed from the first spouse) will exceed his/her individual exclusion amount, the executor for the first spouse will want to file an estate tax return to make the portability election.
The duties of an executor are complex and time consuming. The assistance and input of a professional experienced in taxes and estate planning can be invaluable when attempting to settle an estate.
Contact our financial professionals to learn more about tax strategies.