There are many questions you may have when thinking about estate planning. In addition to worrying about making a will, or setting up a trust, and dealing with decisions about whom to leave your property, there are also more mundane issues to consider. For example, do you still have to file tax returns after your death?
It probably will not come as a surprise that the answer is “yes.” Tax obligations do not end at death. In fact, death raises a number of tax issues that your surviving spouse (if you are married) or the executor of your estate will need to handle.
Personal Income Taxes
If the decedent–the person who has died–was normally required to file a federal or California income tax return for the year that he or she died, said return must be filed by the executor or administrator of the decedent’s estate. The surviving spouse may file the decedent’s return if no executor has been named prior to the filing deadline. The same basic forms–IRS Form 1040 and California Form 940–are used to file a decedent’s returns, with a notation that the filer is deceased.
If the decedent normally filed a joint return, the surviving spouse may file a joint return for the year of the decedent’s death provided he or she has not remarried during that same year. The executor or administrator of the estate must sign the return in place of the decedent.
Even if the decedent owed no federal or California income taxes, the estate may still need to file a return in order to receive any refunds owed.
Fiduciary Income Taxes
A decedent’s income tax return only covers income earned through the date of death. Any income received by the estate (or a trust created by the decedent) after death must be separately reported on a fiduciary income tax return. The federal and state fiduciary returns are known as IRS Form 1041 and California Form 541, respectively.
California Form 541 must be filed if the estate or trust receives more than $10,000 in gross income or $1,000 in net income during the taxable year. The IRS requires a Form 1041 if the estate or trust reports gross income of at least $600. The tax year for an estate generally begins on the date of death and ends on the final day of the twelfth month.
An estate’s income tax return should not be confused with the estate tax, which is a federal levy on the net value of the decedent’s entire estate. Most California residents will not have to worry about the estate tax, which only applies to 2016 estates worth more than $5.45 million (or 2017 estates worth more than $5.49 million). California does not impose a separate estate or inheritance tax.
Need Estate Planning Help?
This is only a brief overview of the tax issues that arise in estate planning. You no doubt have many more questions. If you need help from an experienced San Diego estate planning attorney, contact the Law Office of Scott C. Soady today.