When does an estate require its own tax return?

| Jun 23, 2021 | Probate & Estate Administration

As the executor of an estate, you have to handle a lot of responsibilities for someone else. You need to reach out to all of their creditors and distribute their assets out to their family members.  

You also have an obligation to file their last tax return and also to pay any taxes on the estate itself if the assets have a high enough overall value. One obligation that quite a few people accidentally overlooked is that sometimes the estate itself will need you to file an income tax return.  

When might the estate of a deceased person be subject to income taxation instead of just estate taxation?  

The cutoff for an estate’s income is quite low 

The estate that you managed would need to have a total value of more than $11 million for federal estate taxes to apply to it. The cutoff is so high that the vast majority of estates fall below that threshold and have no concern about estate taxes.  

However, many estate plans instruct an executor to sell things. Maybe you have to liquidate personal property like furniture and jewelry at an estate sale. Perhaps you have to sell stocks, ownership shares in a business or real estate.   

When you have to sell items on behalf of an estate, you may eventually need to pay taxes on the income generated by those transactions. Any estate that generates more than $600 in income in a single tax year will have to file a tax return for that year. If the administration of the estate goes on for more than a year, it may require more than one income tax return. 

If you don’t pay the taxes, you might be the one responsible 

As executor, you take out several risks related to the administration of the estate. One of those risks is financial. Creditors or taxing authorities who believe you inappropriately distributed assets without first paying them could hold you personally accountable for those amounts if they can’t recover property from the heirs of the estate.  

Making sure that you pay all of the necessary taxes is crucial to protecting yourself when you are the one managing the probate process for someone else’s estate.