If you've been named the executor of a parent or other close relative's estate, you may have spent the last few months busily gathering information about assets and debts, opening a trust account for the estate, and doing the physical work of cleaning out your relative's home and disposing of estate property. With the hustle and bustle of this process, it can be easy to put tax issues on the back burner -- however, failing to properly file a tax return for your relative's estate could cause costs and fees to quickly eat into any heirs' inheritances. Read on to learn more about how (and when) you'll need to file taxes following the execution of a relative's estate.
What tax returns do you need to file after a relative's death?
Although your relative's estate is a stand-alone entity, you'll usually need to file two tax returns when the time comes -- one for the estate and one for your relative himself or herself. This personal tax return filed on your deceased relative's behalf allows the IRS to refund any withholdings that exceed the amount of income tax assessed on your relative during the last year of his or her life (or to collect unpaid taxes owed). If this tax return comes due after you've already gathered the information necessary to set up your relative's estate, it should be relatively easy to complete yourself or with the assistance of tax preparation software unless your relative had a complicated financial situation (like a business, income from a trust, or rental income).
If your relative passes away shortly before the deadline for his or her prior year's taxes, you'll just need to file an extension request with the IRS. This will give you some additional time to complete the return and make a payment or request a refund. If your relative's state assesses income taxes, you'll also need to file a state tax return (or extension and return) to avoid any later claims on your relative's estate.
How is the estate's tax return filed?
The IRS requires fiduciaries -- including estate administrators -- to file taxes on behalf of the estate. Although the taxes assessed on estates (and credits and deductions available) are a bit different from the taxes assessed on individual taxpayers, the process is similar. When completing the tax return for the estate, you'll need information on estate income (like payouts from Social Security, dividends on stock accounts, or annuities), distributions to heirs, and other transactions that could potentially incur tax liability. Assets transferred outside the estate, like payable-on-death bank accounts or life insurance policies, won't usually need to be included in the estate's income tax return.
Because this process can be complicated, you may want to enlist the help of a professional tax preparer to help you handle the estate return. The estate will generally pay the cost of this service, and using a professional to help you maximize any deductions or credits available can often help preserve more estate funds than are spent on tax preparation services.
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