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2018-2019 Tax Planning Guide
VIEWpoint Issue 2 | 2018
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Along with their many other obligations, executors (or personal representatives) of estates must ensure that all applicable tax returns are filed. The required federal returns include the decedent’s final income-tax return and, in some cases, an estate income-tax return and/or an estate-tax return.
The executor is responsible for making sure that the decedent’s final federal income-tax return (Form 1040) is filed. Because most individual taxpayers file on a calendar-year basis, the final tax year will typically run from January 1 through the date of death.
Generally, the final return is due on April 15 of the year following the date of death. However, an automatic six-month extension may be obtained by filing the appropriate form and paying any tax due with the extension.
Additionally, the executor must file a federal income-tax return (Form 1041) for each tax year the estate has gross income of $600 or more. This threshold can be quickly reached — for example, a $30,000 investment with a 2 percent dividend will generate $600 in income each year.
The estate’s first tax year begins on the day following the date of death. The executor has the option of choosing either a calendar or a fiscal year. Executors will sometimes want to use the second option to obtain additional tax deferral for the estate or beneficiaries.
A federal estate-tax return (Form 706) is required if the gross estate exceeds the basic exclusion amount in effect for the year of death. Currently, the exclusion amount is set very high — at $5.45 million for 2016 — so most estates do not have to file a return or pay federal estate tax. However, if the decedent was married at the time of death and a possibility exists that the value of the surviving spouse’s estate will exceed the exclusion amount, the executor may still want to file a return. Filing is required to take advantage of the tax law’s “portability” provisions, which allow a decedent to pass any unused exclusion amount to his or her surviving spouse.
Recent amendments to the federal tax rules impose additional reporting requirements on executors of estates that are larger than the basic exclusion amount. Generally, these executors are required to provide — both to the IRS and to each beneficiary of estate property — a statement identifying the value of the property transferred to the beneficiary. The purpose of this rule is to help the IRS determine if beneficiaries are using the correct basis figure in subsequent calculations of depreciation, amortization, capital gain/loss, and other tax-related items.
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