5 minute read

A Guide to Filing Estate Tax Returns

Have questions about the rules for filing estate tax returns? Learn about estate tax return filing requirements, and when they are needed, in this guide.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Navigating the complex landscape of estate tax returns can often seem daunting. When a loved one passes away, understanding when and how to file an estate tax return is crucial. When is an estate tax return required? This is a common question that we’ll be exploring in this guide. Whether you're an executor, beneficiary, or simply planning for the future, this guide has something for everyone.

When Is an Estate Tax Return Required?

An estate tax return, also known as IRS Form 706, is required when the total value of the decedent's estate exceeds the federal estate tax exemption. In 2023, for example, if the total value of the estate is more than $12.92 million, an estate tax return must be filed. It's important to note that this is an aggregate value that includes real estate, stocks, bonds, businesses, and other assets.

However, even estates that fall under the exemption value may still need to file a tax return under certain circumstances. For example, if the deceased person's spouse wishes to make use of the unused exemption (DSUE) amount, also known as portability, an estate tax return must be filed to be able to use this option. The DSUE allows the surviving spouse to add the deceased spouse's unused estate tax exemption to their own, potentially saving a substantial amount in future estate taxes.

Here, it’s important to be aware of state-level estate taxes as well. Some states have their own estate taxes with much lower exemption thresholds compared to the federal level. Thus, an estate that isn't required to file a federal estate tax return might still need to file a state estate tax return. Be sure to check the specific rules and regulations in your state to avoid any potential penalties.

Seeking guidance from a tax professional can provide clarity and help you navigate these complex requirements with ease.

When Is an Estate Income Tax Return Required?

An estate income tax return, or Form 1041, is required when an estate generates more than $600 in annual income

An estate can earn income in the form of dividends on stocks, interest on bonds, or rent from real estate properties owned by the estate. It's important to note that the income tax return for an estate is separate from the deceased person's final individual income tax return, and it's also different from an estate tax return which is related to the total value of the estate.

Understanding when an estate income tax return is required is crucial in the administration of an estate. The person responsible for managing the estate (the Executor or Personal Representative) must file Form 1041 to report the estate's income, deductions, and credits for the tax year. The estate's income tax year begins immediately after the individual's death, and it can be any period that ends on the last day of any month. (It does not have to be the end of the year.)

Do you Have to File an Estate Tax Return If No Tax is Due?

In certain situations, it may still be necessary to file an estate tax return even if no tax is due. As always, it’s best to consult a tax professional for expert guidance. The following includes general guidelines.

The IRS requires an estate tax return (Form 706) to be filed if the gross estate, plus adjusted taxable gifts and specific exemption amounts, exceeds the legally established threshold in the year of the decedent's death. This is a requirement regardless of whether any estate tax is due after taking into account any deductions and credits.

One key reason to file an estate tax return even if no tax is due is related to the portability of the estate tax exemption between spouses. Mentioned earlier, the Deceased Spousal Unused Exemption (DSUE) allows the surviving spouse to add the decedent’s unused exemption amount to their own. However, to be eligible to claim DSUE, the Executor of the deceased spouse’s estate must elect it on a timely-filed estate tax return, even if no tax is due.

Certain states may require an estate tax return even if no federal estate tax is due. State estate tax laws vary widely, and a number of states have lower estate tax exemption thresholds than the federal government. If the estate is in a state with its own estate tax, you may still need to file a state estate tax return.

How to File an Estate Tax Return

Filing an estate tax return entails several steps, each of which requires careful consideration and understanding of the tax laws. The first step involves gathering necessary information about the deceased person's estate, including the value of all assets and debts. This includes everything from real estate property to bank accounts, investments, and personal belongings.

Once all the required information is collated, then complete Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return. This form requires detailed information about the estate, deductions, credits, and computation of tax. It's important to be thorough during this step, as any inaccuracies could potentially lead to complications or penalties.

After Form 706 is completed, it must be filed with the IRS. The IRS stipulates that this form must be filed within nine months of the deceased person's death, although you can request an extension of up to six months if you need more time.

A tax professional or estate accountant can provide you with the necessary guidance and ensure that the estate tax return is completed accurately and filed on time. They can provide invaluable advice that can help maximize deductions and credits, potentially reducing the overall estate tax burden. For a detailed overview of how an estate accountant can assist you, refer to our guide, "Ways in Which an Estate Accountant Can Assist You".

Commonly Asked Questions About Estate Tax Returns

Navigating the nuances of estate tax returns can often seem like a daunting task, filled with a number of questions. To help simplify this intricate process and offer a clearer understanding, we've compiled a list of some of the most commonly asked questions about estate tax returns. We'll cover everything from the basics of estate tax, filing deadlines, to potential penalties for non-compliance - all structured in an easy-to-understand FAQ format.

Does the IRS require an estate tax return?

Yes, the IRS does require an estate tax return, specifically Form 706, for estates with combined gross assets and prior taxable gifts exceeding $12.92 million in 2023. This form should be filed even when no tax is due if the estate is valued at more than the exempt amount (set by law each year).

Is a tax return required for a deceased person?

Yes, a tax return is typically required for a deceased person. In general, the Executor or Personal Representative of the deceased person's estate is responsible for filing and preparing the final individual income tax return, Form 1040. This is important for ensuring that the deceased individual's income is accurately reported and all eligible credits and deductions are claimed. Of course, they can partner with a tax professional for assistance.

Do I need an estate tax closing letter?

An estate tax closing letter is not mandatory, but it can provide peace of mind as it officially confirms the IRS's acceptance of an estate tax return and the closing of the audit. As per the IRS Notice 2017-12, an account transcript can alternatively be requested which serves a similar purpose to an estate tax closing letter.

Do all estates have to file Form 706?

No, not all estates need to file Form 706. Only estates with gross assets and prior taxable gifts exceeding the annually determined exemption amount are required to file this form. For 2023, this threshold is set at $12.92 million, or $13.61 million in 2024. Be sure to confirm the exemption amount as it can change from year to year.

What is the difference between Form 1041 and 706?

Form 1041 and Form 706 serve different purposes in the filing of estate tax returns. Form 1041, also known as the U.S. Income Tax Return for Estates and Trusts, is used to report income, deductions, gains, losses, etc. of estates and trusts. On the other hand, Form 706 or the United States Estate (and Generation-Skipping Transfer) Tax Return, is filed to report the transfer of wealth from an individual who has passed away, specifically for estates exceeding the annual exemption limit (discussed in the section above.)

Ensure a Smooth Process for Your Loved Ones - Create Your Estate Plan with Trust & Will Today

This guide provided key insights into the processing of estate tax returns, outlining the requirements for filing specific forms such as Form 1041 and Form 706. We clarified that not all estates need to file Form 706 - only those with gross assets and prior taxable gifts exceeding the annually determined exemption. 

We hope that you now feel more confident, with a basic understanding of the differences between these important forms and the process of executing a deceased individual's final tax returns. 

Know that Trust & Will is here to help you secure a smooth transition for your loved ones by setting up your own estate plan. Take our free quiz to see where you should get started, or compare our different estate planning and settlement  options today!

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