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Tax Consequences of Closing an Estate

In addition to mourning the passing of a loved one, you will have to burden the responsibilities of filing taxes on their behalf. As Benjamin Franklin famously said, “In this world nothing can be said to be certain, except death and taxes”. There are many different taxes that may need to be paid, so we have outlined many of them below. The role of an executor that has to close out an estate must be taken seriously as the IRS can come after the executor personally for tax underpayments should this not be handled properly. Make sure to file the following tax returns when closing an estate.

IRS Form 1040 – Individual Income Tax Return

Form 1040 is commonly referred to as a personal tax return and is filed by April 15 of each year. The form is required if there is any income generated from January 1 through the date of death of the previous year. Typical income would include wages, interest, pension, Social Security and Medicare benefits. This form will also include deductions that help offset a person’s income, such as medical, mortgage interest, and charitable contributions.

IRS Form 1041 – Income Tax Return for Estates and Trusts

Form 1041 begins after a person passes away. It would include income earned by the estate, any trusts, and any items that have to go through the probate process after the individual passes away. The executor would need to get a new taxpayer identification number (TIN) to replace the social security number of the deceased individual. This form is not to be confused with the Estate Tax Return (Form 706). The 1041 is for income and other tax items on an estate before the estate is settled.

IRS Form 706 – Estate Tax Form

Beginning in 2011, the IRS requires Form 706 for an estate that qualifies for the estate tax. This form is required for individuals that have a gross estate value of $5,450,000 or more in 2016. An estate under that amount has the option to file a Form 706. The Estate Tax is a tax on your right to transfer property at your death. The American Taxpayer Relief Act of 2012 also increased the tax rate from 35% to 40%.  This form is due nine months after the date of death.

IRS Form 709 – Gift Tax Return

Form 709 must be filed in any year that you give over the exclusion amount, which is $14,000 in 2016. You may give up to $14,000 to as many individuals as you would like, but any amount over the $14,000 must be reported on the Gift Tax Return. The amount reported on the Gift Tax Return is deducted from the Estate Tax Exemption amount mentioned above.

IRS Form 56 – Notice Concerning Fiduciary Relationship

If you happen to be the individual that is filing all of these returns on behalf of the deceased, it is also suggested to file Form 56. This notifies the IRS that you’ll be acting on behalf of the estate and ensures that you will receive any notices shipped out by the IRS regarding the deceased.

Contact Chatterton for help closing your estate.

Contact Chatterton & Associates for assistance with your estate planning needs. Our team of Certified Financial Planners™ work closely with our clients to help them preserve their wealth for generations to come.

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