Estate Income Tax

Although there is no federal estate tax due in 2010, there is no tax relief from the income tax return for the estate.  

In the year a person dies, a final personal tax return (Form 1040)  is required if:  1) the gross income of the decedent exceeds the sum of the standard deduction plus the personal exemption  amounts; 2) there is at least $400 or more of self-employment income; 3) the decedent received any advance earned income credit; or 4) there is a refund to be obtained.

The decedent’s final 1040 should include all income and deductions through the date o f death.  These items should include income actually or constructively received and  expenses paid or constructively paid.

A decedent’s estate computes its gross income in much the same manner as an individual.  Most credits and deductions allocable to individuals are also allocable to estates.  A decedent’s estate is a separate entity for  federal tax purposes and should have  its own federal  taxpayer identification number. However, if the gross income for the tax year of a decedent’s estate is under $600, no return is required to be filed.   

Typically, from the date of death forward, estate assets are the responsibility of the fiduciary or  personal representative of the estate.  Fiduciary accounting is responsibility accounting. The fiduciary allocates income and expenses from the date of death until the estate assets are distributed to the beneficiary of those assets.  Most estates distribute the decedent’s assets shortly after death; some, however, retain ownership of those assets (stocks, rental properties, etc.) for some time afterward.   The income generated from those assets is what is reported on the Form 1041.

An estate’s tax year begins on the day after death.  The first year can cover any period of twelve months or less that ends on the last day of the month preceding the month of death.  Therefore, the longest estate period of a person who dies on April 15, 2010,can have is from April 16, 2010, to March 31, 2011.

As you can imagine, this time frame offers many tax planning strategies and opportunities. The estate ‘s retained income is taxed  at a high rate, so it is very important to understand what special tax rules apply to estate income tax returns.

About the Author

Deborah Petrone is a CPA, master of taxation, the manager of specialized tax services and principal for Schlabig. Her responsibilities include finding innovative ways to help business clients as they grow, like using QuickBooks, entity specification and tax planning; preparing fiduciary and estate tax returns; and facilitation of estate and wealth planning. (More about Debbie)

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