There are two kinds of taxes potentially owed by an estate: One on the transfer of assets from the decedent (the person who died) to their beneficiaries (the estate tax), and another on income generated by the assets held by the decedent’s estate (the income tax). This post discusses when an estate is required to file an income tax return.
When someone dies, their individual assets become part of their estate. Any income those assets generate also becomes part of their estate. IRS Form 1041, "U.S. Income Tax Return for Estates and Trusts", is required if the estate produces more than $600 in annual gross income.
The decedent and their estate are separate taxable entities. Thus, before filing Form 1041, the fiduciary (usually the executor) will need to obtain a Tax ID number for the estate.
Deductions and credits typically allowed to individuals are also allowed to estates. But, there is one big difference. A decedent's estate is allowed an income tax deduction for distributions to beneficiaries. And, those income distributions are reported to beneficiaries and the IRS on Schedules K-1 (Form 1041).
For calendar year estates and trusts, Form 1041 and Schedule(s) K-1 must be filed on or before April 15 of the following year. For fiscal year estates and trusts, Form 1041 must be filed by the 15th day of the 4th month following the close of the tax year. If more time is needed to file the estate income tax return an automatic 5 month extension of time is available.
See also: Federal Income Tax and Trusts
Robert Adler, Esq. is an attorney who focuses his practice on wills, trusts and estates. He can be reached at 212-843-4059 or 646-946-8327.