- Does the Estate of the Deceased Have to Pay Federal Taxes on Money Given Yearly to Relatives?
- Who Files the Property Taxes of a Deceased Relative?
- How to Sign Tax Return if Taxpayer Dies Before Filing Taxes
- How to Pay Estate Tax in Installments
- Can You File a Deceased Taxpayer Return Electronically?
- How to Estimate State & Local Taxes for Tax Filing
Sorting through the financial details of your deceased parent's life can be a headache, particularly when you're grieving. Fortunately, you have a little time before you have to worry about tackling an estate tax return. It's basically a matter of tallying up everything your parent owned, then deducting his debts and other exclusions. The balance is taxable – but not necessarily all of it.
Estates Requiring Returns
Not all estates owe federal estate taxes. As of 2013, you must file a return only if the value of your parent's estate exceeds $1 million. This is subject to change if Congress acts to increase the threshold. Otherwise, your parent's estate will pay anywhere from 41 to 60 percent of its value, depending on how great that value is. Not all states impose estate taxes and those that do offer different exemptions, so check with a tax professional to see if your parent's estate is liable for state taxes as well.
You may not know if your parent's estate must pay taxes until you do the math. The equation begins with determining the extent of his gross estate, which is essentially everything he owned: real estate, vehicles, retirement plans, investments, checking and savings accounts and – in some cases – life insurance policies. If your parent named his estate as the beneficiary of the policy, the death benefits are part of his gross estate. If he named an individual as the beneficiary, it's part of his gross estate if he had any "incidents of ownership" during the three years prior to his death. This is the IRS's way of saying he had control over changing the beneficiary, cashing the policy in, or taking loans against it. If he did not own the policy and had no incidents of ownership, the proceeds are not included. When you're totaling the value these assets, you must use their worth as of his date of death, not what your parent paid at the time of acquisition.
After you determine your parent's gross estate, you can make certain deductions. If your other parent is still living and if she's a U.S. citizen, you can subtract any bequests he made to her, including life insurance proceeds. This part of his estate is not subject to tax. The same rule applies if your parent left anything to a qualified charity – you can deduct the value of any such gifts from his gross estate. You can deduct his funeral costs and any probate fees you must pay to your state, as well as other costs incident to settling the estate. You should also subtract all his debts: mortgages, credit cards, auto loans and the like. The balance is what you might have to pay estate taxes on.
Applying the Exemption
If your parent's estate is worth $999,999 after you take all deductions, you don't have to file a return. If it's worth $1.1 million, you must pay taxes on the $100,000 in excess of $1 million. If he was particularly generous during his lifetime, however, it's not quite that easy – the value of large gifts he gave during his lifetime might also come into play, if he did not choose to pay gift tax on those. Taxpayers are permitted to give away gifts and money up to a certain dollar amount each year -- $13,000 a year as of 2012. If your parent exceeded these amounts in any given year and chose not to pay gift tax, you must subtract the excess from his $1 million exemption. For example, if he gave your sister $113,000 to buy a house in 2012 and chose not to pay gift tax, $100,000 would be subtracted from his $1 million exemption. This only applies to gifts made after 1977, however.
If your parent's estate owes a tax, you must first apply to the IRS for an employer identification number. The return is filed under this EIN, not his Social Security number. Use Form 706. You have nine months from his date of death to do so, but if complications arise, you can ask the IRS for an extension. You should also file Form 56 to let the IRS know that you're the individual who prepared and filed the estate's return.