It often comes as a surprise to an estate executor that they may have the obligation to file two income tax returns for the estate in the year following death. The executor has the responsibility to file and pay the deceased person’s final income tax return and any unfiled returns. Also the Executor may have to file an income tax return for the estate for each year the estate is open, if any income is generated.
To add to the complication, the executor may also have an obligation to file a gift tax return and possibly an estate return.
The following is an overview of possible tax return filings for an estate:
- Individual Income Tax: Forms 1040 (NYS IT-201) – Final income tax return for the year of death; executor should confirm no other open income tax filings.
- Gift Tax Return: Form 709 (no NYS equivalent) – Gift tax return for reportable gifts made by the deceased person (decedent).
- Fiduciary Income Tax: Form 1041(NYS IT-205) – Estate income tax return for each year of estate administration.
- Fiduciary Income Tax Return: Form 1041(NYS IT-205) – Trust income tax return if any trusts were created by decedent.
- Estate Tax Return: Form 706 (NYS ET-706) – Estate tax return based on assets owned at date of death.
Some of the returns listed above may only be required if certain thresholds are met. For example, the New York State estate return, Form ET-706, is filed if the decedent owned assets with a value equal to or exceeding $1,000,000 at the date of death. The equivalent filing threshold for the Federal Form 706 is $5,000,000.
But an executor needs to be aware of other reasons which may cause a return to be filed, such as filing an estate return for the deceased spousal unused exclusion (DSUE) election. The DSUE election carries over the unused credit equivalent amount to the surviving spouse, or the filing of a return to start the running of statute of limitations for an issue.
Is there any good news here? Yes, the silver lining is that an executor has the right to seek the help of a tax return preparer and to have the preparer paid by the estate. If an executor thinks any of these issues may be applicable, they should consider seeking the advice of an accountant to help fulfill their fiduciary obligation to the estate.