Personal Representative’s Duties When it Comes to Taxes

They say the only certainties in life are death and taxes. This saying holds especially true for those who have undertaken the role of an estate executor. Virtually all estates are required to navigate the complexities of tax filings, including the decedent’s final income tax return, potential joint tax filings, estate income tax returns, and estate tax returns. Let’s explore these requirements in more detail.

Decedent’s Final Income Tax Return

One of the primary responsibilities of a personal representative is handling the decedent’s final income tax return, typically filed using Form 1040 or Form 1040-SR. (There is a specific time that this needs to be completed.) Since most individuals file their taxes on a calendar-year basis, this final return generally encompasses the period from January 1 to the date of the decedent’s passing. The filing deadline typically falls on April 15 of the year following the date of death. If more time is needed, an automatic six-month extension is available by submitting Form 4868 and any owed taxes.

In some cases, the personal representative may be able to file a joint income tax return with the surviving spouse, provided the spouse has not remarried by year-end. While joint filing can offer certain tax advantages, it may not always be optimal.

Estate Income Tax Return

The IRS treats the decedent and the estate as distinct entities for tax purposes. When the estate generates $600 or more in gross income, the executor must file an income tax return using Form 1041 for the estate. Before filing, obtaining a tax ID for the estate is a prerequisite.

Choosing between a calendar or fiscal year for the estate is a decision that warrants careful consideration. In certain scenarios, the personal representative may gain additional tax benefits for a beneficiary by selecting a fiscal year that concludes after the beneficiary’s taxable year.

Estate Tax Return

The estate tax exclusion amount is substantial, standing at $12.06 million for 2022, with annual adjustments for inflation. However, it’s important to note that this exclusion amount is slated to decrease to $5 million, adjusted for inflation, in 2026.

Even if an estate doesn’t owe federal estate tax due to the current high exclusion amount, the personal representative might still consider filing an estate tax return if the decedent was married. This is because current regulations allow the personal representative of a married individual to make an election, known as “portability,” to transfer the unused exclusion amount to the surviving spouse for potential use on their own estate tax return.

In most cases, this portability election must be made through a timely filed estate tax return for the first spouse. Therefore, if there’s any possibility that the surviving spouse’s entire estate, including the amount transferred from the first spouse, will exceed their individual exclusion amount, the personal representative of the first spouse should file an estate tax return to initiate the portability election.

Managing the responsibilities of an executor is a multifaceted and time-consuming endeavor. Seeking the guidance and expertise of a Maryland estate planning attorney like Raymond E. Brown who is seasoned in matters of taxation and estate planning can prove invaluable when navigating these intricate processes in the settlement of an estate.

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