My wife's mother passed away this year. Her estate is well under estate and inheritance tax limits and her son and daughter live in states that dont have those taxes. How are her final taxes handled? I am particularly interested in how dividends and capital gains are treated. She received some dividends after she died and some stock in her trust have appreciated. Will those both be on her final tax return until the estate is distributed later this year?
I'm sorry for your loss. Understand that the legally recognized/appointed administrator of the estate of the deceased is personally responsible for all this. Any mistakes that result in fines, penalties and late fees are paid by that administrator, and NOT by the estate of the deceased.
First, a final estate needs to be established for the deceased. This is usually done through the probate process in probate court. It's real easy if the deceased left a will. But if the deceased as "any" assets, then an estate needs to be established regardless of the existence of a will or not. Once the probate court has recognized and/or appointed the estate administrator, then the estate administrator needs to obtain an FEIN (Federal Employer Identification Number) for the estate. Don't let the name of that number "employer" confuse you. It's just part of the name of that number, sometimes referred to as the EIN number. You will need this EIN number for the 1041 estate return.
Next, a final 1040 return needs to be done for the deceased that will cover everything up to the date of their passing. If the deceased owes taxes, then they are paid at that time from the estate of the deceased. If the deceased is due a refund, then that refund will go to the estate of the deceased (unless the will states otherwise, or course)
Now if the entity that handled the final affairs (usually the funeral home) have done their job, then the Social Security Administration has been notified of her passing. The IRS pulls taxpayer data from the SSA computers around December of every year. So when the IRS sees that your MIL has passed, they will permanently lock her SSN so that it can not be used fraudulently. That means when you attempt to e-file her personal 1040 final return, it will most likely be rejected with an "SSN LOCKED" error. If that happens (and it probably will) then you have no choice but to print, sign and mail the tax return.
When completing that final tax return in TurboTax, it is extremely important in the personal information section that you select the checkbox for "this tax filer passed away". That way, when you print the return for mailing to the IRS, it will also print an instruction sheet telling you the things you need to include with the mailed return. For example, you may need to include IRS Form 1310 - Statement of Person Claiming Refund Due a Deceased Taxpayer. You may also have to include court provided paperwork showing that you are authorized to sign the return on behalf of the deceased. If necessary, on that personal return the transfer of all assets to the estate of the deceased must be shown.
Now for the 1041 Estate Return:
Once that final return is done and filed, then a 1041 estate return must be completed to at least show the receipt of any and all assets, as well as any financial gains or losses that occurred "after" the passing of the deceased. Assets on the 1041 may very well include things that may not be on the final personal tax return also. For example, if the deceased owned a car, that would need to be shown on the 1041 estate return.
The 1041 estate return is used to show the IRS the final disposition of all of the assets of the deceased. A final 1041 can not be filed until total distribution of all assets (usually to the heirs) has been shown and accounted for. While the estate remains active, it is the estate that will pay taxes on any taxable financial gains realized by the estate, since the date of the passing of the deceased.
Generally, those asset distributions will be shown on a K-1 which is issued by the estate to each beneficiary recipient. It is most common for the estate to pay any and all taxes due prior to distribution of any assets, so that the beneficiary recipient reports nothing concerning the distribution on their tax return. If the estate does not pay the taxes due prior to distribution of the asset, then the beneficiary recipient will be required to pay the taxes on it.
All estate taxes are paid from the estate. That means that if the estate has to sell an asset (such as a car) in order to pay a tax liability, then that's what the estate does.
Also, any and all legal fees incurred by the estate because of and since the passing of the deceased, are paid from and by the estate. This includes probating costs, legal consultation, and legal representation fees. I would HIGHLY recommend that if you are the legally recognized/appointed administrator of the estate, that you seek the services of an attorney in your local area that specializes in wills, estates and probate. The cost of such legal representation can be paid for by the estate.
Take special note here that if you elect to do all this as the legally recognized/appointed administrator, and you make a mistake that results in fines, penalties and late fees, then you personally are liable for those charges from your personal income. Additionally, those charges are not deductible by you on any tax return in any way, form or fashion. It can make the cost of letting the estate pay for qualified legal representation seem like a pittance in comparison.
So I STRONGLY encourage you to seek legal help from someone licensed and qualified to provide it.
Good idea, as qualified help is the way to go. This is especially important if the deceased has an IRA or 401(k) retirement plan in the mix. "Somebody" is going to pay tax on that money sooner or later - be it the deceased now, or the beneficiary recipient now or later. A pro can give you all the possible scenarios for handling a deferred tax retirement account and help you work out which scenario is best, tax-wise. That way, you are making educated and informed decisions, and not just second guessing the law.
Additionally, if the pro you hire screws up and it results in fines, penalties or late fees, you can hold them legally liable and financially culpable for their mistakes.
Thanks Carl, for all the information on your reply. As I read it, in filing the federal with a 1310 form, the refund check will be made out to the ( The Estate of ) then my father name? That would be great, since I have set up an Estate Account with the IRS EIN information .. Did not know if the refund check would have my name since it is on the 1310.
Since there is an estate established, if you're filing a final 1040 tax return then the 1310 is not needed. The refund will just go into the estate account. If a refund is expected with the estate return, then the 1310 is not needed there either, as any refund will be made payable to the estate. Once all refunds are received and deposited to the estate, that's when the estate is distributed to the heirs in accordance with the will (or state law if there is no will) and the estate is dissolved. So if a refund is expected you can't dissolve the estate with the 2018 form 1041 estate return. You'll have to wait for any refunds to be received, deposited to the estate and all estate monies and assets are distributed. Then on the final 1041 you'll indicate the K-1's as final K-1's and so long as everything in the estate is distributed, that will effectively dissolve the estate.
Each tax return you prepare in TurboTax Online requires a separate account with a separate username and password, however, you can use the same email address for all of them. Be careful not to start another return by going back and overwriting everything in the return you just filed. This will replace your information and you won't be able to retrieve your tax return later.
For more information, please see the below TurboTax FAQ:
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