Tax Returns

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Another responsibility of the Executor is to make sure that all of the necessary tax returns are filed.  Although this task should be handled by an accountant, it must be taken very seriously.  The IRS will come after the Executor personally for any tax underpayments (plus penalties and interest).

Here’s an overview of the tax issues that will be addressed by the accountant:

1. The Individual’s Income Tax Returns (U.S. Individual Income Tax Return, Form 1040 and New York State Resident Income Tax Return, Form IT-201)
The first step is to file the decedent’s taxes for the year of his or her death. The final 1040 form covers the period from January 1 though through the date of death.  The return is due on April 16, 2008, for someone who dies in 2007. If the decedent was single, the final 1040 form is prepared in the usual manner.  If there is a surviving spouse, the 1040 form can be a joint return filed as if the decedent were still alive at the years end.  The final joint return includes the decedent’s income and deductions up to the date of death plus the surviving spouse’s income and deductions for the entire year.

If uninsured medical expenses were incurred but not paid before death, the Executor must make an important decision about how to treat the expenses for tax purposes. You can deduct the unpaid expenses, along with any medical expenses paid before death, on the decedent’s final 1040 to the extent they exceed 7.5% of adjusted gross income.  Or, if the estate is subject to the federal estate tax (worth more than $2 million for someone who dies in 2006, 2007 & 2008) it may be to your benefit to deduct the accrued medical expenses on the decedent’s federal estate-tax return rather than the decedent’s income-tax return.

2. The Estate’s Income Tax Returns (U.S. Income Tax Return for Estates and Trusts, Form 1041 and New York State Fiduciary Income Tax Return, Form IT-205)
You may have to file a return for the estate’s income tax as well. (This is entirely different from the federal estate tax).  When a person dies, any income generated by his or her holdings after death is taxed.  The estate’s first income tax year begins immediately after death.  The year-end can be December 31 or the end of any other month that results in an initial tax period of 12 months or less. The return is Form 1041 (U.S. Income Tax Return for Estates and Trusts).  It must be filed by the 15th day of the fourth month after the year-end.  For a person who dies in 2006, the deadline will be April 16, 2007, when the standard December 31 year-end is chosen.

If the annual gross income of the estate is below $600, a Form 1041 is not required.  Nor is it required if all the decedent’s income-producing assets are non-estate assets, that is they bypass probate and go straight to the surviving spouse or other heirs by operation of law (e.g. real estate owned jointly with right of survivorship, retirement accounts and IRAs that have designated account beneficiaries, and with life-insurance proceeds paid directly to designated policy beneficiaries)

3. The Estate Tax Return (U. S. Estate and Generation-Skipping Transfer Tax Return, Form 706 and New York State Estate Tax Return, Form ET-706)
If the estate is worth less than $2 million (for a person who dies in 2006, 2007 or 2008) no estate tax is due on a federal level and Form 706 is not required, unless gifts were made that reduced the unified credit (gifts in excess of $12,000 to a single gift recipient in a single year ($11,000 for gifts in 2002-2005, $10,000 for gifts during 2001 and earlier). Form 706 is due nine months after death, but the deadline can be extended up to six months.

The New York State estate tax threshold, however, is currently 1 million.  There may be an estate tax due on the state level if the estate is above 1 million or there have been deductions to the unified credit during the lifetime of the deceased.

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