Today, I want to talk about the often-overlooked estate income tax filing requirement. I was speaking with a client recently regarding the settlement of her late father’s estate. We were reviewing the matter and she made the statement, “inheritances are not taxed so we do not need to worry about any tax filings or tax payments, right?” This is a common misconception when it comes to taxes in general.
When it comes to estate planning, there are a number of different taxes that could impact your estate planning and your estate settlement. These could include the estate tax, estate income tax, ordinary income tax, gift tax, or capital gains tax. In this case, we will discuss the estate income tax.
Estates are taxed on income that is earned after a person’s death. This tax return is referred to as a fiduciary income tax return and is filed by the personal representative of the estate. However, there is only an obligation to file a fiduciary income tax return if the estate generates gross income in excess of $600 for the taxable year.
The personal representative can choose whether to include the taxable year as the calendar year or the fiscal year. A fiscal year would begin on the date of death and run until no more than 12 months later. Based upon income and deductions available, the fiscal year may be more attractive and result in a lower tax liability.
Let’s See John’s Example
John passed away and his will named his only daughter as both executor and sole beneficiary. After John died and before his estate was formally settled, John’s investment account had generated approximately $12,000 in income. As a result, John’s daughter was required to file an estate income tax return for the income that John’s estate had generated after the date of his death.
In addition to the requirements to file an estate income tax return, the tax rates are different then the ordinary income tax rates. Let’s take a look at the estate income tax rates for the fiduciary income tax return on estates and trusts:
Over $0, but not over $2500 15% Tax Rate
Over $2500, but not over $5900 $375 + 25% of the amount over $2500
Over $5900, but not over $9050 $1225 + 28% of the amount over $5900
Over $8900, but not over $12150 $2068 + 33% of the amount over $9050
Over $12300 $3,179.50 + 39.6% of the amount over $12300
Never forget that the settlement of a loved one’s affairs is complicated with numerous pitfalls and liability exposure for the executor/personal representative that does not follow the rules exactly. Don’t forget, personal liability attaches to the actions of every executor/personal representative!
For More Information
If you are involved in a probate matter or estate settlement matter, or you are interested in setting up your estate plan today so that you can provide the most perfect gift for your loved ones when you pass on, then please contact our office today to schedule an appointment with one of our estate planning and estate settlement attorneys.
We look forward to hearing from you!