Bellevue & Redmond, WA Estate Tax Services: Stephen Nelson, CPA

Estate Tax Basics

If you've just lost a parent, spouse or other family member, you're learning that not only is the loss an emotional trauma, but the loss creates a bunch of tax headaches as well.

We want to start by first offering my condolences to you and your family.

Let us try to help you and your family, too, by providing a birds-eye view of the tax returns the estate owes the federal and state tax authorities. We'll also try to provide the basic information you need if you're the one having to deal with this stuff:

Final 1040 Individual Income Tax Return

Someone needs to file a final 1040 income tax return for the decedent. In the case of a married couple, the surviving spouse probably files the return. If a court has appointed a personal representative or other estate administrator, that appointee probably files the return. The final 1040 return is due April 15th in the year following the death.

706 "Estate Tax" Tax Return

If the decedent's estate is large, the estate will owe the federal government and probably the state government an estate tax tax return and very possibly estate taxes. However, most estates are not large enough that estate tax tax returns and estate taxes are owed the government. For example, currently only estates greater than $1,500,000 owe the federal government estate taxes. (Note: Estate taxes are calculated as a percentage of the total estate using a form 706.) The 706 estate tax return is due nine months after the decedent's death.

1041 Estate Income Tax Return

The estate itself--in other words, the assets the decedent owned and which it distributes to beneficiaries in the months after the death--almost always owes the federal and state government a tax return. This is the tax return on which estate income and estate deductions are shown. The taxable income or loss generated by the estate, however, isn't taxed directly to the estate but instead is allocated to the beneficiaries. Due dates for estate income tax returns are a little bit tricky and represent a tax planning opportunity. In a nutshell, the estate income tax return (the 1041 return) is due on the 15th day of the fourth month after the estate's tax accounting year ends. However, as long as the estate's first accounting year isn't longer than twelve months, the estate can choose which month ends the tax accounting year for the estate. For example, if someone passes away on October 15 of, say, 2005, the estate's income tax year can end on October 31, 2005... or on November 30, 2005... or on the last day of any other month though September 30, 2006.

One other note about 1041 estate income tax returns: The personal representative or estate administrator needs to get an employer identification number, or EIN, from the Internal Revenue Service for use in reporting its income and deductions. Often the attorney probating the estate gets an EIN, but you can also get one yourself using the SS-4 form.

People regularly ask several other questions about estate taxation details, so let us answer those questions here, too:

Do You Prepare Estate-related Tax Returns?
Yes, we do. In fact, we'll prepare estate-related tax returns (final 1040s, 1041s, and 706s) both for Washington residents and residents of other states.
How much does it cost to have estate-related tax returns prepared?
As noted elsewhere at this web site, fees for estate and gift tax returns and for estate and trust income tax returns vary, but usually run from $500 to $1000 per return (depending on how much work the attorney does).
I have a quick question--can I ask you via email or a quick telephone call?
Sure. But unfortunately we can't provide free service. The estate will need to pay for services. Fortunately, my fees for estate-related tax services quite reasonable: I charge $100 per half hour. If you can't afford a professional's help, you should contact the IRS. Note, too, that the instructions for forms 1041 and 706 provide lots of great information. You may be able to get your questions answered for free by reading those IRS publications.

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