Estate taxes are one of the most frustrating aspects of estate planning. They’re higher than most tax rates in the country, and they can make it difficult to leave your assets to the people you care about. But struggles with taxation don’t end at the planning stage. Executors of a person’s estate can get into hot water with the IRS very easily.
If you don’t do everything you need to do when closing an estate after the owner’s death, you might end up personally liable. The IRS can open an investigation and send you exorbitant bills for the excess funds.
If you believe that there have been any problems with the filing of estate taxes for an estate that you’re the executor of, you should talk to a lawyer. Even if you’re not sure the IRS has taken notice, speaking with an attorney is the best way to determine whether any wrongdoing actually occurred and how to rectify it.
If you have been contacted with the IRS, you need to contact an attorney even more urgently. It’s possible that you are now the subject of a federal investigation. Investigators are trained to get you to make statements that incriminate yourself. They’re also allowed to lie to you about the nature of their questions.
There are two ways that a person might become the executor of someone’s estate. First, in the case that there’s a will, this document may name them as the estate executor. They will be the one responsible for making sure that all instructions in the will are carried out. In cases that don’t involve a will, an administrator will be appointed by the probate court. Usually, it will be a family member or widowed spouse who volunteers.
Executors don’t necessarily need to have a strong financial background. In fact, many of them don’t. What you need to do is determine what assets belong to the estate, pay the debts and taxes that are owed, and distribute the remains among the beneficiaries of the will or the heirs by rights.
If you mishandle the filing of back taxes or tax returns, you are the one responsible for the missing funds. You will be the one on the hook for the income, the interest, and any penalties incurred. That’s the case even in situations where you take on a professional accountant or attorney to handle the legal aspects. For this reason, it’s vital that you work with educated professionals that you trust wholeheartedly.
There are a few different problems that can pop up when you’re dealing with estate taxes.
You need to file one last 1040 tax return for the deceased party. It will report all income and tax obligations from the first day of the year through the day of death. This return must be filed by the usual federal due date, which is in the year following the death. Failing to file this document is a serious breach.
In cases where the deceased person wasn’t married, everything about the 1040 remains as it usually does. If they have a spouse who’s survived, it’s possible to file a joint tax return the same way you would if both parties were alive. A joint return will include the income and tax deductions of the living spouse, plus whatever income and deductions the deceased had prior to death.
You might run into issues when there are large amounts of unpaid medical bills. The executor of an estate is required to decide how to declare these. If the expenses exceed 7.5 percent of the deceased’s adjusted income, you can deduct all the unpaid expenses above that from the 1040 total. That way, you don’t have to pay taxes on a large portion of the income.
Wealthy estates must pay a federal estate tax. You won’t need to worry about this unless the estate was more than eleven million dollars. But if you do, you can deduct the unpaid expenses on the estate tax return instead. This is a more tax-advantaged choice, because it allows you to save 40 percent in taxes instead of just 10 to 20 percent.
You might also be in the position of filing a tax return for the estate. This is the case for any estate that generates new income following the death of the holder. Many people aren’t aware of this step, and you could get in trouble for underreporting taxable income if you don’t file the form.
The twelve-month period for income taxes starts the day after the person dies and continues until it’s been a year since their death. It’s not subject to the usual federal scheduling.
An estate tax return is required, as mentioned, for estates meeting a wealth threshold of about eleven million dollars. There are complicated rules regarding taxes and gifts with estates. If you don’t properly report the gifts or pay the gift taxes, you might be subject to penalties.
If you find yourself in the position of handling this large an estate, it’s best to get both an accountant and tax attorney to prevent potential problems from occurring in the first place.
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