One of the most complicated areas of estate administration for Colorado personal representatives is the filing and payment of taxes. A decedent’s taxes can have a significant impact, not only on the estate, but on the personal representative (PR). A personal representative can be held personally liable for taxes and penalties owed if he or she fails to properly file returns. This includes past due tax returns that the decedent failed to file before death! This risk of personal liability is just one reason that personal representatives should tread carefully with regard to taxes.
This article addresses the three primary types of taxes that present issues after death: the decedent’s personal income tax, the estate’s income tax, and federal estate tax (which is distinct from estate income tax).
Decedent’s Personal Income Tax
Depending on the deceased person’s gross income, age, and tax filing status, the personal representative of the estate may need to file a personal income tax return for the decedent. If the return is an individual tax return, the word “DECEDENT” and the date of death should be clearly written across the top of the return. This return is typically due on April 15 of the year following the death.
The personal representative should request from the IRS confirmation that the decedent had been current with regard to filing all previous tax returns. The personal representative should also file IRS Form 56 (Notice Concerning Fiduciary Relationship) so that all communications about the decedent’s tax information will be sent directly to the PR.
If the decedent was married, the personal representative may file the final joint tax return together with the surviving spouse. The surviving spouse may file alone, including the decedent’s information, if no PR has been appointed before the due date of the tax return. If the surviving spouse married during the decedent’s year of death, however, he or she may not file a joint return with the decedent.
Once all taxes are filed, the personal representative may file a request with the IRS to be discharged of all personal liability. The personal representative should also be mindful of his or her own taxes; fees earned for serving as personal representative are taxable income and must be reported.
Estate Income Tax
If the decedent’s estate continues to receive income after the decedent’s death, federal and state income tax returns must also be filed on behalf of the estate. Common sources of post-death income are interest and dividends from stock and income from rental property. If the decedent owned income-producing property in multiple states, state tax returns may need to be filed in each.
Unlike the decedent’s personal income tax return, which uses his or her Social Security number, a separate Taxpayer Identification Number (EIN) must be provided by the IRS for use on estate income tax returns.
Federal Estate Tax
The property a decedent owns, and from which he or she has a right to receive income at the time of death, is subject to federal estate tax (Colorado has no estate tax). The estate tax is in addition to the federal income tax. Because of the large estate tax exemption ($5,430,000 in 2015 for an individual, double that amount for a couple), only about two people in a thousand will have to file an estate tax return because they owe money.
In most cases, there is no tax on property left to a surviving spouse, however, it may benefit the surviving spouse to file a return to “port” the decedent’s unused estate tax exemption amount so that, upon death, the surviving spouse’s estate has a larger exemption. In order to do this, however, an estate tax return must be timely filed for the decedent even if no tax is due.
This article has been a brief summary of tax issues in estate administration, but there are many other aspects that deserve attention: medical deductions, capital gains, gift taxes, and more. To learn more about estate administration and tax obligations, or to receive knowledgeable guidance for these matters, contact the experienced estate planning and probate attorneys at Davis Schilken. Call us at 303-670-9855 to arrange a consultation at one of our two locations in The Denver Tech Center and Golden, Colorado. We look forward to working with you.