When you are named the executor or personal representative of a person’s estate, that is not a task to take lightly. You have many steps and legal hurdles ahead.
One of those obstacles is taxes. No one likes taxes. It’s bad enough when you’re dealing with your own taxes but now you also have to deal with the taxes of a deceased loved one.
Final income tax returns
As the personal representative of the estate, one task that you will be charged with is filing the decedent’s final income tax returns. As you’re probably aware from filing your own taxes, this is not a quick process.
In addition to the final income tax returns, you will also be responsible for any outstanding tax returns the decedent had not yet paid. Any back taxes that are owed will be paid from the estate and reduce any benefit to the heirs.
Everyone has heard about estate tax. This is a tax levied by the federal government on estates valued over a certain amount. In 2018, this amount is $5.6 million.
This means that anyone who dies with an estate valued at less than the exemption amount, $5.6 million, their estate will not be subject to estate tax. Any amount exceeding the exempt amount will be taxed at 40%.
Estate income tax
Yes, the estate can be required to pay income taxes. During probate, some assets may increase in value. As a result, the executor or personal representative is required to report any income from those estate assets. Attorneys fees are deductible on the estate income tax return.
Beneficiary income tax
Depending on the type of asset passed from the decedent to the beneficiary, the beneficiary may be required to pay income tax. Savings accounts, vehicles, and life insurance are all examples of assets that are not taxed. Why? Because they’ve already been taxed once when the decedent was paid a salary, bought the vehicle, or bought the life insurance policy. The government won’t require someone to be double taxed.
However, some assets will be taxed as income to the heir because they were not taxed to the decedent. These can be:
- IRA, 401(k), and other retirement benefits
- Savings bond interest
- Annuity gains
While this list is not exhaustive, it’s good to be aware of the fact that some assets will be taxed as income to the heirs of the estate.
Contact us today
Losing a loved one is a challenging time in a person’s life. When you are tasked with handling the affairs of your loved one, that can weigh heavily on you. Not only do you want to make sure you’re doing what you think your loved one would want, but you are also needing to make sure you are handling the estate in compliance with the law. And taxes are complicated.
That’s why you need a trusted probate attorney Allentown, PA relies on at your side to advise you correctly. They understand the complexities associated with probate and taxes and are ready to guide you.
Thank you to our friends and contributors at Klenk Law for their knowledge about estate planning, probate, and taxes.