When a person dies, their estate might need to handle various tax responsibilities. Understanding whether an estate must pay income taxes to the IRS can help executors manage financial matters.
Understanding estate taxes and income taxes
First, it’s important to distinguish between estate taxes and income taxes. Estate taxes are taxes on the transfer of the deceased person’s assets to their heirs. Income taxes, on the other hand, are taxes on the income earned by the deceased person or their estate after their death.
After a person dies, their estate executor must report their income for the year up to the date of death to the IRS. The executor files the deceased’s final personal income tax return, known as Form 1040. The same income tax rules that applied to the person while they were alive also apply on this final return.
Income taxes on the estate’s income
If the estate generates income after the person’s death, such as interest, dividends, or rental income, the estate must pay income taxes on that income. The executor must file a separate tax return for the estate, known as Form 1041. This is the fiduciary income tax return. This reports income earned by the estate from the date of death until the estate settlement.
Estate taxes in Washington
In addition to federal taxes, Washington imposes its own estate tax on estates that exceed a certain value. As of 2023, estates valued over $2.193 million are subject to Washington estate taxes. However, this is different from the federal income tax. It only applies to the value of the estate transferred to heirs, not the income generated by the estate.
Managing tax responsibilities after death
Tax liability is complex, so executors have to be careful when handling an estate. Knowing the difference between the deceased’s final income taxes and the estate’s income taxes is key. By filing the correct forms and paying attention to both federal and state tax laws, executors can fulfill their duties properly. This helps protect the estate, ensuring heirs receive their inheritance without unnecessary delays.