When someone dies, a personal representative is in charge of the estate to collect assets, pay off the debts, and distribute the remaining assets to heirs or beneficiaries. (FYI – The personal representative is called an “Executor” if the person was identified in the will, or an “Administrator” if he or she was appointed by the court because there was no Will). The personal representative is also in charge of taxes, both federal and state, for the individual and for the estate. Here are a few important points for tax purposes:
1. Form 1040 – Individual Income Tax Return
The personal representative will file a Form 1040 tax return for the year the individual died, covering January 1 until the date of death. Form 1040 is due on the usual date, April 15. If the individual was married at death, this can be a joint return.
2. Form 1041 – Estate Income Tax Return
Any income earned on assets after the decedent’s death but before the asset is distributed to a beneficiary is treated as income to the estate. Uncle Sam won’t let that income slide past his reach, so the estate files an income tax return if the annual gross income to the estate is $600 or greater. Small estates or estates with assets that can be distributed quickly often avoid this tax. Form 1041 is due on the 15th day of the 4th month following the close of the tax year. If the estate uses the calendar year, the return is due April 15.
3. Form 706 – Inheritance and/or Estate Tax Return
A federal estate tax return must be filed (and estate tax due) if the gross estate exceeds the exemption amount, which is $5.12 million in 2012. Form 706 is due nine months after death, but can be extended for six months. An Iowa inheritance return will likely be required if the estate is distributed to persons other than a spouse, lineal descendants or lineal ascendants.
4. EIN Number
If the estate will be filing Form 1041 and/or Form 706, the estate must get its own Federal Employer Identification Number (EIN or FEIN). An EIN for an estate is equivalent to a social security number for an individual. An EIN will be needed to open a checking account for the estate.
A personal representative has many duties when it comes to administering an estate, which is probably why most personal representatives hire a tax professional to complete the tax matters. After all, if you dread doing your own taxes, doing someone else’s taxes probably isn’t too appealing.