Estate Tax Preparation and What You Need to Kno
As experienced estate tax preparers, we understand the emotions and complexities when you lose someone close to you. There are many things that need to be done to tie up affairs, not to mention grief accompanying each item. One of those items involve filing and paying the final taxes of the decedent (the person who passed).
Not to worry, KeyLin has your back through these tough times. As expert estate tax preparers, we’re here to answer questions and clarify the complex estate tax preparation process so you can focus on what’s important.
Tax returns required after death:
The most frequently asked questions we get regarding estate taxes are (1) what needs to be done from a tax perspective in order to close the estate of a decedent and (2) what taxes will I have to pay on assets I inherited from a decedent.
In the year the death occurred, there are three types of tax returns that may be require:
A final tax return for the decedent. This final tax return reports any income earned in the year of their death, prior to their date of death. Final income information is reported on Form 1040. Most people are most familiar with this form as it is filed every year to report income earned. This filing is due on April 15th of the year following death.
An Estate Income Tax Return. If, after the decedent’s death, income was earned on the assets held in their estate or trust, an estate income tax return (Form 1041) may be required. This type of return reports any income generated after the date of death. The tax on that income is sometimes paid with the filing of this return or is passed through to beneficiaries to report on their own individual tax returns. This filing is due on April 15th of the year following death and may be required each year after that depending on when assets are distributed to beneficiaries.
Estate Tax Return. Estate taxes are sometimes levied on estates over a certain value as of the date of death. In order to avoid paying estate taxes, the date of death value of assets must be under a certain exemption level, a spousal exemption must be used, and/or certain expenses can be deducted, reducing the total value of the estate. As of January 1, 2022, the federal exemption is $12.06 million. Some states also have an exemption limit. This means, even though federal taxes may not be levied against an estate, state tax may still apply. As of January 1, 2022, twelve states and the District of Columbia impose estate taxes and six impost inheritance tax. Learn more about State Estate and Inheritance taxes here.
Inheritances and Potential Taxes
The second most common question we get after a person has passed is whether the beneficiaries will be obligated to pay tax on the assets they inherit. This answer depends heavily on what types of assets are in the estate, what type of inheritance is received and how assets are titled at death.
Generally, cash and life insurance proceeds are inherited tax-free. This means beneficiaries often do not pay taxes on any cash or life insurance proceeds they receive as direct beneficiaries. Stock, real property or other non-cash assets are usually subject to tax when sold. Beneficiaries pay tax on the difference between the asset’s fair market value on the date of date and the eventual sale price. Beneficiaries inherit a stepped-up basis on these types of assets. This means, instead of using the original purchase price on the asset, beneficiaries instead inherit a basis that is the fair market value of an asset on the date of death. Often this is more favorable than the original basis on the asset.
Inherited assets from a retirement account depend on many factors. Taxes vary depending on what type of account it is and who is inheriting the account. Spouses of a decedent usually have the most leeway in deciding how or when to withdraw or transfer funds. Other beneficiaries may be restricted as to how much or when they can withdraw funds. Beneficiaries should consult their tax or financial advisors before taking any distribution from a retirement account.
Grieve Without Worrying About Estate Tax Planning
Estate taxes and inheritance taxes can be a confusing aspect of the tax code, not to mention the emotions behind it. Consulting with a trusted estate tax preparer can often be very beneficial in these types of situations. At KeyLin, we’re there for you during this difficult time. Schedule a meeting with us today.
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