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When is an estate tax return required?

There are two types of estate tax returns: fiduciary and estate tax.

Not every estate must file both or either tax return.


Fiduciary

A fiduciary estate tax return (Form 1041) is filed when a decedent's estate earns $600 or more in gross income during the tax year OR one of the estate's beneficiaries is a nonresident alien.


Gross income includes interest, dividend, retirement distributions that would be taxable to the decedent had the decedent survived, short and long-term capital gains, and business income. Every year an estate generates income of at least $600, it must file a tax return.


Distributions from estates are not taxable unless the distribution is income. In that case, the estate reports the distribution to the IRS and the beneficiary, and the beneficiary pays tax on the distributed estate income.


A fiduciary tax return is due on the same day as an individual tax return, which usually is April 15th of the following year. Some years, that date will change depending on holidays. For example, the 2021 fiduciary tax return was due on April 18, 2022.


Estate

An estate tax return (Form 706) is filed when a decedent's estate is valued at over $11.7 million on the date of death OR the executor would like to elect to transfer the decedent's unused exclusion amount to the surviving spouse.


In determining the value of the estate, the executor must calculate total adjusted taxable gifts made during the decedent's life since 1976, total exemption allowed for gifts, and the value of the gross estate on the date of death.


Gross estate is defined broadly. It includes all assets owned: real, personal, tangible, intangible. Examples include debts due to the decedent, interest in business, insurance on the life of the decedent or another, royalties, leaseholds, judgments, shares in trust funds, livestock, household goods, wearing apparel, rights, and anything else imaginable. Unless specifically excluded, everything an estate owns must be added to the gross value.


Married individuals can combine their $11.7 million exemption by having the surviving spouse elect to transfer any unused exclusion amount. For example, if the first spouse had a gross estate of $3 million, and the surviving spouse has a gross estate of $15 million, the surviving spouse may elect to transfer $8.7 million in exemption to exclude all $15 million from estate tax.


An estate tax return is due 9 months from the date of death, not the following year as is usually the case for individual, business, and fiduciary returns. Thus, if a decedent dies at the start of the year, don't wait until the following tax season. Start preparing the estate tax return ASAP.

 

Did your loved one recently pass away? Do you need help figuring if and what kind of tax return to file? Let us guide you through this difficult time. You have more important things to worry about than taxes. Call us at (612) 440-3988 to schedule an appointment.





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