If you are serving as personal representative administering the estate of a loved one, among your most important duties are ensuring that all of the decedent’s tax returns are filed and any taxes are paid. The following are the main categories of taxes that you should be considering.
Decedent’s Final Income Tax Return
As personal representative, you are responsible for filing the decedent’s final individual income tax return if the decedent’s income for the year of death exceeds the filing requirements or if there has been any withholding. You must also ensure that any state or federal taxes owing are paid in a timely manner. The decedent’s final income tax return is due on April 15 of the year following the year of death. You must report any income that the decedent received from January 1st through the date of the decedent’s death.
Estate Income Tax Return
Any income received after death is taxable to the decedent’s estate, which is a separate tax-paying entity. Income received by the estate is reported on the federal and state fiduciary income tax return. Taxable income to the estate includes any wages or other income earned before death but not received until after death, taxable IRA distributions received by the estate, interest, dividends, gain on the sale of property and other income received by the estate. Although deductions are much more limited than for the individual income tax return, certain expenses of administration may be deducted from estate income.
The personal representative may elect to report the taxes on a calendar year or fiscal year. If a fiscal year is used, it begins on the date of death and ends on the last day of the month preceding the one-year anniversary of the decedent’s death. All successive tax years begin on the first day of the month of the decedent’s death.
Estate Taxes
Finally, as personal representative, you should be aware of federal and state estate taxes. Estate taxes are based on the value of the decedent’s assets when he or she dies. The decedent’s estate is subject to federal estate taxes if the value on the date of death exceeds $5.43 million (adjusted for inflation). The decedent’s estate is subject to Minnesota estate taxes for decedents dying in 2015 if the value of the estate exceeds $1.4 million. The Minnesota exclusion is scheduled to gradually increase to $2 million by 2018.
Estate taxes are paid by the estate instead of the beneficiaries, and are based on the value of all of the decedent’s assets, including jointly owned property, life insurance benefits and other non-probate assets. Certain deductions may be taken from the taxable estate for marital and charitable bequests, expenses of administration, and certain debts and losses. If applicable, the estate tax return is due 9 months from the date of the decedent’s death. The due date may be extended by an additional 6 months, but the personal representative must pay any estimated taxes by the original due date to avoid penalties and interest.
If you are administering the estate of a loved one, seek advice from an experienced tax professional. Failure to file tax returns and pay taxes in a timely manner can lead to significant penalties and interest to the estate and potentially personal liability to the personal representative. If you have any questions regarding estate administration or the contents of this article, please feel free to contact Randall Sayers at 651-332-8725; rsayers@hdbob.com.