Estate Taxes | Tax Preparation Phoenixville, PA

Estate Taxes

Do you need assistance as an executor in estate administration?

When a loved one passes on preparing the final tax returns and doing the tax returns for the estate can be a difficult and confusing process best left to a professional. We can prepare those returns for you and help you every step of the way.

Sorting out the Taxes in an Estate

Many individuals are confused about the tax returns that need to be filed after a person is deceased. Often the confusion lies in the fact that there are several types of returns with different objectives. There are inheritance tax returns and income tax returns. They are as follows:

Income Tax Returns

(These are the returns used to report income and determine income tax before and after death). This discussion is for cash basis taxpayers:

  • Tax FormsFederal form 1040- income tax return while alive. Income and allowable deductions after death belong on another return.
  • Federal form 1041- income tax return starting at the death of the taxpayer. Income and allowable deductions after death go on this return
  • Pa form Pa-40- income tax return while alive. Income after death is reported on another return.
  • Pa form Pa-41- income tax return starting at the death of the taxpayer. Income after death goes on this return.
 
>> Income Tax Tip: When someone dies the value of assets owned are “stepped up” creating a tax savings. An example is if the deceased owned a share of stock purchased at $10 and after death it was sold for $100 and the value at the date of death was $95 on the “before death” tax return, gain would have been $90 but on the “after death” return the gain is only $5.

 

Estate Tax Returns

(These returns are an inventory of assets owned and laibilities owed by the taxpayer at the time of death. A value of the estate is then determined and an estate tax is imposed on this net amount if it exceeds certain amounts.)

  • Federal form 706: No tax is imposed until the estate value exceeds an IRS amount that is under review currently. Most tax payers with the new higher exclusion limits are exempt from paying federal estate tax. Assests over $5.34 million of assests will be included.
  • State form Rev-1500: The Pennsylvania tax applies regardless of the size of the estate. Different tax rates apply based on the relationship of the beneficiary to the deceased individual.
>> Tax & Financial Planning Tip: High net worth individuals sometimes purchase life insurance in an irrevocable life insurance trust to pay estate taxes. Life insurance is not subject to income tax and is not considered to be part of the estate when structured properly inside of the trust.

 

This is a simplified explanation of a complicated matter to help create an understanding of the difference of the two types of returns. It is best to consult a professional to assist in this process.