A Guide to Tax Filing for Estate Administrators

Managing an estate comes with its share of responsibilities, not least of which is handling taxes. As the old saying goes, “In this world, nothing is certain except death and taxes” — and when you are an estate administrator, you are uniquely tasked with managing both at the same time!

If you are serving as an estate administrator, you may need to file an estate income tax return, also known as IRS Form 1041, when the estate earns more than $600 in gross income during a tax year.¹ Below, I will walk you through when a return is necessary, the steps to file, and some key points to keep in mind during the process. The information below is generalized, but know that the tax filings require special attention to the details of the actual facts, timing, and circumstances involved.

When is an Estate Income Tax Return Required?

An estate income tax return is required if the estate earns $600 or more in gross income during a tax year. This income could come from a variety of sources, such as:

  • Interest from savings accounts, certificates of deposit (CDs), or bonds
  • Dividends from stocks or mutual funds
  • Rental income from real estate
  • Business income if the estate includes an operating business

In addition, you will need to file if any beneficiary of the estate is a nonresident alien, even if the gross income is below $600.

Steps for Filing an Estate Income Tax Return

Filing an estate income tax return involves several steps, but the process is manageable if you stay organized. Here is a general description of the steps involved:

1. Obtain an Employer Identification Number (EIN):
The estate must have its own EIN, which serves as a tax ID. You can apply for an EIN online via the IRS website, but typically this is applied for by your attorney if you are working with one. Do not apply for multiple EIN numbers!

2. Determine the Tax Year:
Estates can use either a calendar year or a fiscal year. The tax year begins on the day after the decedent’s death and ends on either December 31st for a calendar year or the last day of the chosen fiscal year. In most cases, you will use the calendar year.

3. Gather Income Documentation:
Collect all documents related to the estate’s income, such as bank statements, 1099 forms, and rental property records. It is your duty to act prudently and keep good records. Do not mix estate money with other accounts or money.

4. Deduct Expenses:
Estates are allowed to deduct certain expenses, including:

  • Administrative fees (e.g., legal and accounting services)
  • Property maintenance and repairs
  • Distributions to beneficiaries

5. Complete and File Form 1041:
Fill out IRS Form 1041 to report the estate’s income and deductions. The form must be filed by the 15th day of the fourth month after the end of the estate’s tax year (e.g., April 15 for a calendar year). Not all tax programs support this form, and the ones that do typically charge a fee separate from the regular tax filing.

6. Pay Any Taxes Due:
Ensure timely payment of any taxes owed to avoid penalties or interest. If the estate is expected to be open for a year or more, consider paying estimated taxes (especially if there is rental income activity in the estate!).

States with Estate and Inheritance Taxes

In addition to federal estate taxes, some states impose their own estate tax, inheritance tax, or a combination of both. This is an important consideration for estate administrators, as state-level taxes can significantly impact the estate’s overall tax liability. Currently, 18 states and the District of Columbia have estate or inheritance taxes, or both.

Key Considerations:
Exemptions and Thresholds Vary: Each state sets its own exemption amounts and tax rates. For example, in Oregon, only estates valued above $1 million may be subject to state estate tax, while other states have higher exemptions.

Residency and Property Location Matter: State estate and inheritance taxes typically apply based on the decedent’s state of residence or the location of the property. For example, a vacation home in Washington could trigger Washington estate taxes on that property, even if the decedent lived elsewhere.

Tax Planning Can Help: Estate planning strategies, such as gifting assets during one’s lifetime or establishing trusts, can reduce state-level tax liabilities.

Understanding how these state taxes apply to an estate is crucial for effective administration and tax planning. If the estate you are managing includes property or assets in one of these states, consulting with a tax professional or estate attorney is highly recommended. This is especially important considering that there can be some “traps” set for the non-professional.

Understanding the Difference Between Form 1041 and Form 706

It is important to distinguish between two commonly confused IRS forms: Form 1041, the estate income tax return, and Form 706, the federal estate tax return.

Form 1041 is used to report income earned by an estate after the decedent’s death, such as interest, dividends, or rental income, and applies when the estate earns more than $600 in a tax year. In contrast, Form 706 is required only if the gross value of the decedent’s estate exceeds the federal estate tax exemption threshold (currently $13.61 million for 2024, indexed annually for inflation).

While Form 1041 addresses income taxes on ongoing earnings during the estate settlement process, Form 706 focuses on assessing federal estate taxes on the transfer of the decedent’s assets to heirs. Each serves a distinct purpose, and not all estates will need to file both.

Estate administration might not be anyone’s dream job, but it is a meaningful one. And when it comes to navigating the combined inevitabilities of death and taxes, staying organized and informed makes all the difference. A little humor (and maybe a professional or two) can go a long way in making the process smoother. We are financial professionals with the experience to help clients manage the day-to-day financial responsibilities of their own house as well as the technical expertise to aid heirs and estate administrators. Give us a call if you would like to discuss your particular situation.

Doug “Buddy” Amis, CFP®

1. Facts in this post of whether to file, when to file, and allowable deductions are taken from the current (2023) Instructions for Form 1041 and Schedules A, B, G, J, and K-1

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