The federal government taxes inheritance property using estate tax rules. Once an individual or decedent dies, the decedent’s estate pays the taxes for the gross estate if the decedent’s taxable gross estate exceeds a certain amount. Typically, the decedent’s filing status, income and age at death determine whether there are estate taxes due. The estate’s executor must file tax returns the same year the death occurred, or file for an extension of time.
Individual Responsible to File Tax Returns
An executor or personal representative is responsible for filing income tax returns and paying estate taxes by the filing deadlines. The personal representative or executor is the person named in the will to administer the property within the estate and distribute it according to the will’s directives. If there is no will through probate, and the individuals dies intestate (without a will), then the court may appoint an administrator to administer the will. Similarly, if the named executor is not able or is unwilling to administer the will, a court may appoint a substitute administrator. The administrator or executor must apply for a tax identification number or employer identification number on the estate’s behalf. Appointed executors or administrators must file IRS Form 56 or Notice Concerning Fiduciary Relationship immediately after appointment.
IRS Time Limits to File Returns
The IRS typically has three years after the tax filing to determine the tax liabilities and assess taxes. Personal representatives or executors have legal rights to file a request for a prompt assessment to determine tax liabilities after filing the estate’s tax return by using IRS Form 4810. Executors and administrators are responsible for any additional taxes assessed by the IRS until discharge from estate duties.
Requesting Personal Liability Discharge
Executors and administrators can request a formal discharge from any personal tax liabilities by filing IRS Form 5495. The IRS must notify the taxpayer of current tax liabilities and once the executor has paid the entire taxes due, then the executor is no longer personally liable for any future tax assessments.
Estate Tax Rules and Gift Tax Rules
After the decedent dies, the estate performs a general accounting of the estate’s fair market value on the date of death. The property inclusive in this accounting consists of real estate, cash, trust, securities and any other business interests or securities. The taxable amount after certain allowable reductions or deductions is the “gross estate” value. Estate taxes also include gift taxes exceeding the allowable tax-free amounts and any allowable credits. The IRS provides specific guidelines to determine tax-free gift allowances and generation skipping tax rules. The IRS generally recommends that estate executors responsible for administering estates in excess of $1 million obtain legal tax advice or specific tax guidance from a CPA to determine tax liabilities.
Estate Tax Return Documentation
Generally, the tax rules require estates to file an estate tax return within nine months of the decedent’s death or the estate must request an extension to file. The IRS requires documentation and information regarding the decedent’s death. The IRS requires the estate to file copies of the official death certificate, the decedent’s trusts and wills and copies of any valuations or appraisals. Additionally, estates in litigation must file pertinent court documents regarding official court rulings and estates with unusual property transfers must file documents reflecting the disposition.
Since tax laws may frequently change, you should not use this information as a substitute for legal or tax advice. Seek advice through a certified accountant or attorney licensed to practice tax law in your jurisdiction.
Jill Stimson has worked in various property management positions in Maryland and Delaware. Stimson worked for the top three property management companies in the commercial industry and focuses her career on property building logistics and tenant relationships. She holds a Juris Doctor and a Bachelor of Science in psychology.