The following are the basic returns that may need to be filed following a taxpayer’s death, dependent on the filing requirements of each:
Form 1040 – File the decedent’s final federal return as usual on Form 1040, 1040A, etc., and a corresponding state return, if required.
Form 1041 – This is the federal income tax return of the estate–used to report income received on the assets in the estate, including sales of property. An equivalent return for the decedent’s state of residence may also be required.
Form 706 – Used to compute the tax on the value of the assets in the estate and is required if the gross estate is greater than the taxpayer’s estate tax exemption. Unless reduced because of pre-death gifts, the federal estate tax exemption is $5.54 million in 2016 ($5.49 million in 2017).
Effective for deaths of married individuals occurring after 2010, by election, if all of the decedent’s estate tax exemption is not used, the excess can carry over to the surviving spouse to be added to his or her own exemption when the time comes. The election must be made on the estate tax return of the first spouse to die. Therefore, even if the value of that deceased spouse’s estate is less than the 706 filing requirement it will be necessary to file a Form 706 to make the election.
CAUTION: Some may consider not filing the 706 to avoid the trouble and cost when the estate value of the first spouse to die is below the filing requirement and there is not a foreseeable need for the carryover for the surviving spouse. That choice should be considered carefully since future inheritances, lotto winnings, inflation, tax law changes and other events could make the surviving spouse’s estate subject to unexpected inheritance tax.
A state estate tax return may also be required, depending on the decedent’s state of residency and that state’s filing requirements; many states do not have an estate tax or piggy-back on the federal return
Please contact this office for return preparation assistance.