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Wednesday, September 11, 2019

Filing the Estate Income Tax

The executor of the estate has many responsibilities when it comes to the managing and settling of the estate. One such responsibility is filing income tax on behalf of the estate. The executor is required to file a federal income tax return using Form 1041 for the estate if the estate has a gross income of $600 or greater for the relevant tax year, or there is a beneficiary of the estate who is a nonresident alien. 

You are probably wondering what kind of income would be generated by the estate. Sometimes, an estate includes something like rental property. The proceeds from the rental property would be included in the taxable income for the estate. Additionally, the deceased person may have been paid a salary earned prior to death but owed and paid after death. This would also be included as taxable income for the estate. Interest on bank accounts and other financial accounts that are part of the estate will also be taxable income for the estate.

How Does the Executor Calculate Income Tax for the Estate?

The executor uses IRS Form 1041 to file an income tax return for the estate. The return will be filed under the estate’s name and taxpayer identification number (TIN). The executor is responsible for paying any tax owed by the estate and the tax is paid out of assets of the estate. After all of the estate’s taxable income is calculated, the executor will need to address any deductions the estate may take.

As far as tax deductions go, there are several available to the estate. First and foremost, all estates get a $600 exemption on their taxes. Additionally, all estate income distributions to beneficiaries are tax-deductible. If income is distributed to the beneficiaries, they are responsible for paying income tax on the distribution. You must provide each beneficiary a Schedule K-1 form that shows how much the beneficiary received from the estate during the pertinent tax year.

Expenses associated with the administration of the estate are also deductible. For instance, if experts were needed during the estate administration process, the experts’ fees would be deductible. Experts include professionals such as attorneys or accountants that aided in the administration of the estate. 

Additionally, any money you had to spend to close out the estate by doing things like collecting and managing estate assets, paying debts, and distributing property to beneficiaries, is deductible. If the estate had to go through formal probate proceedings, deductible expenses associated with the administration of the estate will also include things like court filing fees. It is also important to note that Form 1041 does not allow the estate to take a deduction for medical expenses or funeral expenses.

Estate Administration Attorneys

The probate and estate administration process has many different steps that must be properly executed. If you have any questions or concerns regarding the estate administration process, Monk Law can help. We not only provide quality estate plans for our clients, but we also help our clients as estates proceed through the probate process. Contact us today.

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| Phone: 803-594-4453
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