Tax Returns Necessary After Somebody’s Death

A reader writes in, asking:

“A family member appears to be in his final days. I have not seen his will, but I have been told that I am named as executor. I have never been an executor before, so I am doing some research on what my responsibilities will be. Could you perhaps discuss what tax filings will be necessary?”

Firstly, one thing you should know if you choose to accept the role of executor is that you are allowed to hire assistance (e.g., an attorney to guide you through the process and/or a tax professional to prepare the necessary returns).

And as far as basic tax information, IRS Publication 559: Survivors, Executors, and Administrators will be very helpful.

Background Information (Basic Definitions)

What exactly is an estate? An estate is a legal entity that comes into being when a person dies. The purpose of the estate is to gather the decedent’s assets, pay the decedent’s debts and expenses, and distribute the remaining assets. The estate exists until all of the assets have been distributed to heirs or other beneficiaries.

The executor is the person named in the will to administer the estate. (If no will exists, if no executor is named in the will, or if the named party refuses to serve as executor, the court will appoint an administrator to perform the same functions.)

Form 1040 (Final Individual Tax Return)

The executor must file the final income tax return for the decedent for the year of death as well as any returns from prior years that have not yet been filed. (For example, if you die in February of a given year without yet having filed your return for the prior year, your executor will have to file your return for that prior year as well as the return for the year of death.)

The final tax return is due on the same date it would have been due if the death had not occurred (i.e., typically April 15 of the following year).

For the final return and any returns for prior years not yet filed, the executor may choose to file a joint return with the decedent’s surviving spouse, if applicable.

Form 1041 (Income Tax Return for the Estate)

The executor also must file an income tax return (Form 1041) for the estate for each year that the estate remains open. Broadly speaking, the estate has to pay tax each year on any income it earns that is not distributed to beneficiaries. Form 1041 is where all such income and distributions are reported and where the resulting income tax is calculated.

For calendar year estates, Form 1041 for each year is due April 15 of the following year.

Form 706 (Estate Tax Return)

Form 706 is the estate tax return. That is, it’s the return relating to the federal estate tax (filed once), whereas Form 1041 discussed above is the income tax return for the estate (filed every year until the estate is closed).

Form 706 is also used to report and calculate the tax on generation-skipping transfers.

Form 706 generally only has to be filed if one of two things is true:

1. The gross estate, plus taxable gifts made during the person’s lifetime (i.e., gifts beyond the annual gift tax exclusion amount) exceed the applicable threshold ($12,060,000 for 2022), or
2. The executor elects to transfer the deceased spousal unused exclusion amount to the surviving spouse.

If Form 706 must be filed, the executor must file by 9 months from the date of death, with a 6-month extension possible.

State Returns

In addition to the above, there will generally be forms to file at the state level as well (e.g., income tax return for the decedent, income tax return for the estate, and potentially an estate tax return if the state has an estate tax).