An Overview of Tax Returns when Administering an Estate [New York]
One of responsibilities of the Executor is to make sure that all of the necessary tax returns are filed. Here's an overview of the tax returns that may need to be filed:
1. The Individual's Income Tax Returns (U.S. Individual Income Tax Return, Form 1040 and New York State Resident Income Tax Return, Form IT-201)
The first step is to file the decedent's taxes for the year of his or her death. The final 1040 form covers the period from January 1 though through the date of death. The return is due on April 15, 2008, for someone who dies in 2007. If the decedent was single, the final 1040 form is prepared in the usual manner. If there is a surviving spouse, the 1040 form can be a joint return filed as if the decedent were still alive at the years end. The final joint return includes the decedent's income and deductions up to the date of death plus the surviving spouse's income and deductions for the entire year. 2. The Estate's Income Tax Returns (U.S. Income Tax Return for Estates and Trusts, Form 1041 and New York State Fiduciary Income Tax Return, Form IT-205)
You may have to file a return for the estate's income tax as well. (This is entirely different from the federal estate tax). When a person dies, any income generated by his or her holdings after death is taxed. The estate's first income tax year begins immediately after death. The year-end can be December 31 or the end of any other month that results in an initial tax period of 12 months or less. The return is Form 1041 (U.S. Income Tax Return for Estates and Trusts). It must be filed by the 15th day of the fourth month after the year-end. For a person who dies in 2006, the deadline will be April 16, 2007, when the standard December 31 year-end is chosen.
If the annual gross income of the estate is below $600, a Form 1041 is not required. Nor is it required if all the decedent's income-producing assets are non-estate assets, that is they bypass probate and go straight to the surviving spouse or other heirs by operation of law (e.g. real estate owned jointly with right of survivorship, retirement accounts and IRAs that have designated account beneficiaries, and with life-insurance proceeds paid directly to designated policy beneficiaries)
3. The Estate Tax Return (U. S. Estate and Generation-Skipping Transfer Tax Return, Form 706 and New York State Estate Tax Return, Form ET-706)
If the estate is worth less than $2 million (for a person who dies in 2006, 2007 or 2008) no estate tax is due on a federal level and Form 706 is not required, unless gifts were made that reduced the unified credit (gifts in excess of $12,000 to a single gift recipient in a single year ($11,000 for gifts in 2002-2005, $10,000 for gifts during 2001 and earlier). Form 706 is due nine months after death, but the deadline can be extended up to six months.
The New York State estate tax threshold, however, is currently 1 million. There may be an estate tax due on the state level if the estate is above 1 million or there have been deductions to the unified credit during the lifetime of the deceased.
Although life-insurance proceeds are generally free of any income tax, they are included in the decedent's estate for estate-tax purposes, even if the money may go directly to beneficiaries. Life-insurance proceeds are the most common cause of unexpected estate-tax liability. Where the beneficiary is the surviving spouse, however, they aren't included in the decedent's estate, as long as the surviving spouse is a U.S. citizen. This is referred to as the unlimited marital-deduction privilege.
4. Form 56
Form 56 (Notice Concerning Fiduciary Relationship) notifies the IRS that you are the personal representative of the estate regarding tax matters. It ensures you'll receive all notices from the IRS.