Returns That Need To Be Filed

The following are the basic returns that may need to be filed following a taxpayer's death, dependent on the filing requirements of each:

Form 1040 - File the decedent's final federal return as usual on Form 1040, 1040A, etc., and a corresponding state return, if required.

Form 1041 - This is the federal income tax return of the estate--used to report income received on the assets in the estate, including sales of property. An equivalent return for the decedent's state of residence may also be required.

Form 706 - Used to compute the tax on the value of the assets in the estate and is required if the gross estate is greater than the taxpayer's estate tax exemption. Unless reduced because of pre-death gifts, the federal estate tax exemption is $5 million in 2011 (same as 2010). (Note: Originally there was to be no federal estate tax in 2010 and instead there was a modified carryover basis regime to determine the basis of inherited assets. Subsequently, Congress retroactively reinstated the estate tax but with an option for the estate to avoid the tax and instead use the modified carryover basis instead.)

Effective for deaths of married individuals occurring in 2011 and 2012, by election, if all of the decedent's $5 million estate tax exemption is not used, the excess can carry over to the surviving spouse to be added to his or her own exemption when the time comes. The election must be made on the estate tax return of the first spouse to die. Therefore, even if the value of that deceased spouse's estate is less than $5 million, it will be necessary to file a Form 706 to make the election.

A state estate tax return may also be required, depending on the decedent's state of residency and that state's filing requirements; many states do not have an estate tax or piggy-back on the federal return

Form 8939 This form is only applicable to 2010. When the modified carryover basis applies, Form 8939 must be attached to the decedent's final return. Form 8939 details the allowable step-up to FMV at the date of death. There is a $10,000 potential penalty for failure to file the 8939 on the decedent's final return. The 8939 takes the place of Form 706 (Estate Tax Return).

Please contact this office for return preparation assistance.