Ben Franklin coined the phrase “…in this world nothing can be said to be certain except death and taxes.”
The following paraphrase is apropos: Nothing in death is more certain than taxes. It is crucial not to forget the “Tax Man” when a family member dies. Although not every decedent or estate pays income, estate or gift tax, four different tax returns may need to be filed.
Final federal income tax return
Unless the decedent dies on Dec. 31, he or she will have lived part of a given year and will not have filed a tax return for that year. Thus, the question arises: Who files the decedent’s income tax return, IRS Form 1040, on the decedent’s behalf?
Filing the return falls to the decedent’s personal representative. As stated in previous columns, in Texas the most efficient and least expensive method of establishing a personal representative is to name that person independent executor or executrix in a valid will.
The second question: When does the personal representative file the return? It is to be prepared for the tax year beginning Jan. 1 of the year of death and ending on the date of death, and it should be filed on April 15 of the following year, as if the decedent had survived the entire year.
The representative may request and will be granted an automatic four-month filing extension. An additional two-month extension may be applied for, and may be allowed under certain circumstances. However, neither reprieve extends the due date.
In many instances, the attorney representing the personal representative in handling the estate does not prepare the decedent’s final tax return but will coordinate with the decedent’s CPA in seeing that the return is filed in a timely manner.
Estate’s fiduciary income tax return
The personal representative must also file the estate’s fiduciary income tax return, IRS Form 1041.
Timing of the filing depends upon whether the representative chooses a calendar or fiscal year for the estate. The advantage of choosing a fiscal year is that it saves the expense of filing a partial year return for the year of death and may defer payment of income taxes by the estate or beneficiaries.
The fiscal year must end on the last day of a calendar month and not exceed more than 12 months. For instance, if the date of death is Nov. 3, 2012, the representative can choose a fiscal year that ends on Oct. 31, 2013, and avoid having to complete a fiduciary return for Nov. 3 - Dec. 31, 2012.
If income is distributed to beneficiaries from the estate, these distributions are treated as having been made on the final day of the estate’s fiscal year.
The tax return is due on the 15th of the fourth month following the end of the estate’s fiscal year. In our example, the return would be due on Feb. 15, 2014.
Final gift tax return
If the decedent has made any taxable gifts that were not previously reported to the IRS, the personal representative must file a gift tax return, IRS Form 709. If the decedent made any unreported gifts prior to the year of death, they should be reported immediately.
The return for taxable gifts made during the year of death is due on April 15 of the following year.
As with the income tax return, if the gift tax return cannot be filed in a timely fashion, the representative can seek the same extensions as allowed with Form 1040. As with income tax, allowed postponement in filing does not delay the due date.
Decedent’s federal estate tax return
Filing of a federal estate tax return, IRS Form 706, is required only if a decedent’s estate is of a value over the amount for the annual exclusion from that tax.
For a person dying in 2012, that exclusion is $5.12 million. As mentioned in a previous column, the current estate and gift tax exclusions “sunset” at the end this year and the exemption from estate tax amount reverts to $1 million per person. If Congress does not pass either a bill which sets the exemption at some other amount or a bill which does away with the estate tax entirely, a person dying in 2013 will have to file a return and pay tax if his or her estate has a value in excess of $1 million dollars.
The federal estate tax return is due nine months following the decedent’s death. Therefore, the estate tax return for the decedent who dies on Nov. 3, 2012, is due on Aug. 3, 2013.
The personal representative may obtain a six-month extension for reasonable cause. This extension is not automatic and does not alter the due date.
The representative may seek relief to extend the payment date up to 10 years if the estate lacks sufficient funds to pay the tax - IRS will decide whether to grant such relief. Although the maximum allowed is 10 years, most extensions granted are no longer than one year.
Seek Professional Assistance
Personal representatives of an estate should obtain professional assistance in determining what tax returns must be filed; completing forms correctly; and meeting filing deadlines. Failure to file proper returns and to pay the appropriate amounts due can result in costly penalties.
Sandra W. Reed is an attorney with Katten & Benson, an elder law firm in Fort Worth. She lives in Somervell County, near Chalk Mountain. If you have questions about this column or wish to suggest a topic of interest she may be reached at (254) 797-0211 or firstname.lastname@example.org.