When someone dies (decedent), all of that person’s property (estate) needs to go somewhere. It is important for you as your clients’ accounting expert and advisor to encourage each of your clients to have a will prepared with an executor assigned to handle the settlement and distribution of the estate after your client passes away.
In most cases, if a person dies and has a surviving spouse, the estate is automatically transferred to the living spouse, unless the will stipulates otherwise. When there is no surviving spouse, the estate is distributed according to the instructions in the will by the executor, or, in case of no will, goes to probate court and an executor is assigned. Probate draws out the process of settlement and can cause a loss of value in the estate because of associated costs, so it’s always better to have a will.
One of the biggest jobs of the executor will be handling taxes, both personal taxes and estate taxes. By educating yourself on the responsibilities of executing a will, you will provide your clients and your clients’ heirs with a valuable service and you could expand your firm in a much-needed area.
Personal income taxes
A decedent’s personal tax returns are not much different than if the person had not died. A Form 1040 would be completed for the decedent, due by April 15 of the following year. If the person dies early in the year, for instance, on February 2, 2023, before submitting 2022 taxes, the executor would be responsible for filing both 2022 and 2023 taxes. This would apply also to any state and local taxes.
Federal estate income tax
If the estate generates more than $600 in annual gross income during the time it is being settled (for instance, from investments, rental income, etc.), the executor submits Form 1041, the estate’s federal income tax return. The fiscal year for the estate begins on the decedent’s death date. For someone who died February 2, 2023, the tax year-end would be approximately February 2, 2024 (exact date adjusted for weekends and holidays), with taxes due on the 15th day of the fourth month after the tax year-end. The executor may also choose to just keep the regular December 31 deadline, the same as the deadline for personal taxes. An automatic 5 ½ month extension for filing Form 1041 is easily obtained.
Federal estate tax
Most people will not have to pay federal estate tax. If the estate is quite large ($12.06 million for tax year 2022), or if the decedent made significant gifts to individuals in recent years that would bring the estate in excess of the estate value limit, IRS Estate Tax Return Form 706 must be filed. This is a tax on the value of the estate, not on income generated, which is filed with Form 1041. You will want to familiarize yourself with the details in order to advise your client or your client’s executor.
State estate taxes
Fortunately, PA does not have an estate tax. However, it does have an inheritance tax, which the inheritors of the estate would pay. This includes out-of-state heirs for real property and tangible personal property located in PA.
Estate taxes can be very confusing to executors, and they will need the guidance of a tax expert in order to avoid any mistakes and subsequent interest fees or fines. Become well-versed and knowledgeable about the intricacies of estate taxes in order to benefit your clients and grow your practice.