How does probate affect taxes?
Part of the probate process is to ensure that all debts and taxes are paid from the estate left by the decedent. With regard to debt, creditors are invited to lodge claims against the estate by a certain time (usually three months) and then, if they are approved by the executor, the debts are paid. If they are rejected by the executor, the debtors have to take legal action to recover what they claim is due to them.
Taxes are dealt with slightly differently. The death of a person will effectively end the deceased’s tax year, and all taxes are referred to the estate. There are several forms that may require completion for tax purposes when a person dies. These include:
- A federal income tax return (1040)
- A federal fiduciary income tax return (1041)
- A federal gift tax return (709)
- A federal estate tax return (706)
If the decedent would have been required to file a tax return for income, then this responsibility reverts to the executor. Therefore the executor will have to assume responsibility for the filing of an income tax return (if applicable) as well as other returns such as gift tax returns and inheritance tax returns. The executor will also be responsible for dealing with matters relating to taxes such as:
- Property taxes
- Business taxes
- Real estate taxes
The requirements for tax return filing can very from state to state, and an executor will need to investigate the state laws where the probate is being handled in order to ascertain what needs to be filed and what the deadlines are. Any money due in taxes must be paid from the estate of the decedent.
