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 a tax professional, 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 through the date of death. The return is usually due on April 15 of the year following the year of death. 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.
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). The return is due on April 15 of the year following the year of death when the standard December 31 year-end is chosen.
If the annual gross income of the estate is below $600, a Form 1041 is usually 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 the estate tax threshold, no estate tax is due, then on a federal level, IRS Form 706 is not required, unless gifts were made that reduced the unified credit (gifts in excess of the annual gift tax exclusion: $15,000 for 2018, $14,000 for gifts in the years 2013-2017). 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 is currently $5,250,000 for decedents dying from 4/1/17 – 12/31/18. There may be an estate tax due on the state level if the estate is above threshold or there have been deductions to the unified credit during the lifetime of the deceased.
Although life-insurance proceeds are generally free of any income tax, they are included in the decedent’s estate for estate-tax purposes, even if the money may go directly to beneficiaries. Life-insurance proceeds are the most common cause of unexpected estate-tax liability. Where the beneficiary is the surviving spouse, however, they aren’t included in the decedent’s estate, as long as the surviving spouse is a U.S. citizen. This is referred to as the unlimited marital-deduction privilege.
4. Form 56
Form 56 (Notice Concerning Fiduciary Relationship) notifies the IRS that you are the personal representative of the estate regarding tax matters. It ensures you’ll receive all notices from the IRS.