Penalty.   There is a penalty for failure to file a tax return when due unless the failure is due to reasonable cause. Reliance on an agent (attorney, accountant, etc.) is not reasonable cause for late filing. It is the personal representative's duty to file the returns for the decedent and the estate when due.

Identification number.   The first action you should take if you are the personal representative for the decedent is to apply for an employer identification number (EIN) for the estate. You should apply for this number as soon as possible because you need to enter it on returns, statements, and other documents that you file concerning the estate. You also must give the number to payers of interest and dividends and other payers who must file a return concerning the estate.

  You can get an EIN by applying online at www.irs.gov/businesses or by calling 1-800-829-4933. You can also apply using Form SS-4, Application for Employer Identification Number. Generally, if you apply by mail, it takes about 4 weeks to get your EIN. See the form instructions for other ways to apply.

  Payers of interest and dividends report amounts on Forms 1099 using the identification number of the person to whom the account is payable. After a decedent's death, the Forms 1099 must reflect the identification number of the estate or beneficiary to whom the amounts are payable. As the personal representative handling the estate, you must furnish this identification number to the payer. For example, if interest is payable to the estate, the estate's EIN number must be provided to the payer and used to report the interest on Form 1099-INT, Interest Income. If the interest is payable to a surviving joint owner, the survivor's identification number must be provided to the payer and used to report the interest.

  The deceased individual's identifying number must not be used to file an individual tax return after the decedent's final tax return. It also must not be used to make estimated tax payments for a tax year after the year of death.

Penalty.   If you do not include the EIN or the taxpayer identification number of another person where it is required on a return, statement, or other document, you are liable for a penalty for each failure, unless you can show reasonable cause. You also are liable for a penalty if you do not give the taxpayer identification number of another person when required on a return, statement, or other document.

Notice of fiduciary relationship.   The term fiduciary means any person acting for another person. It applies to persons who have positions of trust on behalf of others. A personal representative for a decedent's estate is a fiduciary.

  If you are appointed to act in any fiduciary capacity for another, you must file a written notice with the IRS stating this. Form 56, Notice Concerning Fiduciary Relationship, can be used for this purpose. The instructions and other requirements are given on the back of the form.

  You should file the written notice (or Form 56) as soon as all of the necessary information (including the EIN) is available. It notifies the IRS that, as the fiduciary, you are assuming the powers, rights, duties, and privileges of the decedent, and allows the IRS to mail to you all tax notices concerning the person (or estate) you represent. The notice remains in effect until you notify the appropriate IRS office that your relationship to the estate has terminated.

Termination notice.   When you are relieved of your responsibilities as personal representative, you must advise the IRS office where you filed the written notice (or Form 56) either that the estate has been terminated or that your successor has been appointed. Use Form 56 for the termination notice by completing the appropriate part on the form. If another person has been appointed to succeed you as the personal representative, you should give the name and address of your successor.

Request for prompt assessment (charge) of tax.   The IRS ordinarily has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any additional tax that is due. However, as a personal representative you may request a prompt assessment of tax after the return has been filed. This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. This request can be made for any income tax return of the decedent and for the income tax return of the decedent's estate. This may permit a quicker settlement of the tax liability of the estate and an earlier final distribution of the assets to the beneficiaries.

Form 4810.   Form 4810, Request for Prompt Assessment Under Internal Revenue Code Section 6501(d), can be used for making this request. It must be filed separately from any other document. The request should be filed with the IRS office where the return was filed. If Form 4810 is not used, you must clearly indicate that you are making a request for prompt assessment under section 6501(d) of the Internal Revenue Code. You must identify the type of tax and the tax period for which the prompt assessment is requested.

  As the personal representative for the decedent's estate, you are responsible for any additional taxes that may be due. You can request prompt assessment of any of the decedent's taxes (other than federal estate taxes) for any years for which the statutory period for assessment is open. This applies even though the returns were filed before the decedent's death.

Failure to report income.   If you or the decedent failed to report substantial amounts of gross income (more than 25% of the gross income reported on the return) or filed a false or fraudulent return, your request for prompt assessment will not shorten the period during which the IRS may assess the additional tax. However, such a request may relieve you of personal liability for the tax if you did not have knowledge of the unpaid tax.

Request for discharge from personal liability for tax.   An executor can make a written request for discharge from personal liability for a decedent's income and gift taxes. The request must be made after the returns for those taxes are filed. It must clearly indicate that the request is for discharge from personal liability under section 6905 of the Internal Revenue Code. For this purpose, an executor is an executor or administrator that is appointed, qualified, and acting within the United States.

  Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. If the IRS has not notified the executor, he or she will be discharged from personal liability at the end of the 9-month period.

  

Even if the executor is discharged from personal liability, the IRS will still be able to assess tax deficiencies against the executor to the extent that he or she still has any of the decedent's property.

Insolvent estate.   Generally, if a decedent's estate is insufficient to pay all the decedent's debts, the debts due the United States must be paid first. Both the decedent's federal income tax liabilities at the time of death and the estate's income tax liability are debts due the United States. The personal representative of an insolvent estate is personally responsible for any tax liability of the decedent or of the estate if he or she had notice of such tax obligations or had failed to exercise due care in determining if such obligations existed before distribution of the estate's assets and before being discharged from duties. The extent of such personal responsibility is the amount of any other payments made before paying the debts due the United States, except where such other debt paid has priority over the debts due the United States. The income tax liabilities need not be formally assessed for the personal representative to be liable if he or she was aware or should have been aware of their existence.

A return should be filed to obtain a refund if tax was withheld from salaries, wages, pensions, or annuities, or if estimated tax was paid, even if a return is not required to be filed. Also, the decedent may be entitled to other credits that result in a refund. These advance payments of tax and credits are discussed later under Credits, Other Taxes, and Payments.

If the decedent was a nonresident alien who would have had to file Form 1040NR, U.S. Nonresident Alien Income Tax Return, you must file that form for the decedent's final tax year. See the instructions for Form 1040NR for the filing requirements, due date, and where to file.

Generally, the personal representative and the surviving spouse can file a joint return for the decedent and the surviving spouse. However, the surviving spouse alone can file the joint return if no personal representative has been appointed before the due date for filing the final joint return for the year of death. This also applies to the return for the preceding year if the decedent died after the close of the preceding tax year and before filing the return for that year. The income of the decedent that was includible on his or her return for the year up to the date of death (see Income To Include, later) and the income of the surviving spouse for the entire year must be included in the final joint return.

A final joint return with the decedent cannot be filed if the surviving spouse remarried before the end of the year of the decedent's death. The filing status of the decedent in this instance is married filing a separate return.

For information about tax benefits to which a surviving spouse may be entitled, see Tax Benefits for Survivors, later, under Other Tax Information.

If the decedent accounted for income under the cash method, only those items actually or constructively received before death are included in the final return.

Generally, under an accrual method of accounting, income is reported when earned.

If the decedent used an accrual method, only the income items normally accrued before death are included in the final return.

The death of a partner closes the partnership's tax year for that partner. Generally, it does not close the partnership's tax year for the remaining partners. The decedent's distributive share of partnership items must be figured as if the partnership's tax year ended on the date the partner died. To avoid an interim closing of the partnership books, the partners can agree to estimate the decedent's distributive share by prorating the amounts the partner would have included for the entire partnership tax year.

On the decedent's final return, include the decedent's distributive share of partnership items for the following periods.

If the decedent was a shareholder in an S corporation, include on the final return the decedent's share of the S corporation's items of income, loss, deduction, and credit for the following periods.

Include self-employment income actually or constructively received or accrued, depending on the decedent's accounting method. For self-employment tax purposes only, the decedent's self-employment income will include the decedent's distributive share of a partnership's income or loss through the end of the month in which death occurred. For this purpose, the partnership's income or loss is considered to be earned ratably over the partnership's tax year.

If the decedent was married and domiciled in a community property state, half of the income received and half of the expenses paid during the decedent's tax year by either the decedent or spouse may be considered to be the income and expenses of the other. For more information, see Publication 555, Community Property.

A Form 1099 should be received for the decedent reporting interest and dividends earned before death and included on the decedent's final return. A separate Form 1099 should show the interest and dividends earned after the date of the decedent's death and paid to the estate or other recipient that must include those amounts on its return. You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts.

For example, a Form 1099-INT reporting interest payable to the decedent may include income that should be reported on the final income tax return of the decedent, as well as income that the estate or other recipient should report, either as income earned after death or as income in respect of the decedent (discussed later). For income earned after death, you should ask the payer for a Form 1099 that properly identifies the recipient (by name and identification number) and the proper amount. If that is not possible, or if the form includes an amount that represents income in respect of the decedent, report the interest as shown next under How to report.

See U.S. savings bonds acquired from decedent under Income in Respect of the Decedent, later, for information on savings bond interest that may have to be reported on the final return.

The treatment of an Archer MSA or a Medicare+Choice MSA at the death of the account holder depends on who acquires the interest in the account. If the decedent's estate acquires the interest, the fair market value of the assets in the account on the date of death is included in income on the decedent's final return. The estate tax deduction, discussed later, does not apply to this amount.

If a beneficiary acquires the interest, see the discussion under Income in Respect of the Decedent, later. For other information on Archer MSAs, see Publication 969, Health Savings Account and Other Tax-Favored Health Plans.

Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was established reaches age 30, or dies, whichever is earlier. The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. If the decedent's estate acquires the interest, the earnings on the account must be included on the final income tax return of the decedent. The estate tax deduction, discussed later, does not apply to this amount. If a beneficiary acquires the interest, see the discussion under Income in Respect of the Decedent, later.

The age 30 limitation does not apply if the individual for whom the account was established or the beneficiary that acquires the account is an individual with special needs. This includes an individual who, because of a physical, mental, or emotional condition (including a learning disability), requires additional time to complete his or her education.

For more information on Coverdell ESAs, see Publication 970, Tax Benefits for Education.

Accelerated death benefits are amounts received under a life insurance contract before the death of the insured individual. These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider.

Generally, if the decedent received accelerated death benefits either on his or her own life or on the life of another person, those benefits are not included in the decedent's income. This exclusion applies only if the insured was a terminally or chronically ill individual. For more information, see the discussion under Gifts, Insurance, and Inheritances under Other Tax Information, later.

You can claim the decedent's personal exemption on the final income tax return. If the decedent was another person's dependent (for example, a parent's), you cannot claim the personal exemption on the decedent's final return.

If you do not itemize deductions on the final return, the full amount of the appropriate standard deduction is allowed regardless of the date of death. For information on the appropriate standard deduction, see the income tax return instructions or Publication 501.

Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. This includes expenses for the decedent, as well as for the decedent's spouse and dependents.

Qualified medical expenses are not deductible if paid with a tax-free distribution from an Archer MSA.

A decedent's net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent's final income tax return. A net operating loss on the decedent's final income tax return can be carried back to prior years. (See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.) You cannot deduct any unused net operating loss or capital loss on the estate's income tax return.

You can claim on the final income tax return any tax credits that applied to the decedent before death. Some of these credits are discussed next.

Taxes other than income tax that may be owed on the final return of a decedent include self-employment tax and alternative minimum tax, which are reported on Form 1040.

The income tax withheld from the decedent's salary, wages, pensions, or annuities, and the amount paid as estimated tax, for example, are credits (advance payments of tax) that you must claim on the final return.

Third party designee.   You can check the “Yes” box in the Third Party Designee area of the return to authorize the IRS to discuss the return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as the designee to answer any questions that may arise during the processing of the return. It also allows the designee to perform certain actions. See the income tax package for details.

Signature.   If a personal representative has been appointed, that person must sign the return. If it is a joint return, the surviving spouse must also sign it. If no personal representative has been appointed, the surviving spouse (on a joint return) should sign the return and write in the signature area “Filing as surviving spouse.” If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative.”

Paid preparer.   If you pay someone to prepare, assist in preparing, or review the tax return, that person must sign the return and fill in the other blanks in the paid preparer's area of the return. See the income tax package for details.

If a member of the Armed Forces of the United States dies while in active service in a combat zone or from wounds, disease, or injury incurred in a combat zone, the decedent's income tax liability is abated (forgiven) for the entire year in which death occurred and for any prior tax year ending on or after the first day the person served in a combat zone in active service. For this purpose, a qualified hazardous duty area is treated as a combat zone.

If the tax (including interest, additions to the tax, and additional amounts) for these years has been assessed, the assessment will be forgiven. If the tax has been collected (regardless of the date of collection), that tax will be credited or refunded.

Any of the decedent's income tax for tax years before those mentioned above that remains unpaid as of the actual (or presumptive) date of death will not be assessed. If any unpaid tax (including interest, additions to the tax, and additional amounts) has been assessed, this assessment will be forgiven. Also, if any tax was collected after the date of death, that amount will be credited or refunded.

The date of death of a member of the Armed Forces reported as missing in action or as a prisoner of war is the date his or her name is removed from missing status for military pay purposes. This is true even if death actually occurred earlier.

The decedent's income tax liability is forgiven if, at death, he or she was a military or civilian employee of the United States who died because of wounds or injury incurred:

The forgiveness applies to the tax year in which death occurred and for any prior tax year in the period beginning with the year before the year in which the wounds or injury occurred.

For astronauts who died in the line of duty after December 31, 2002, income tax liability is forgiven for the tax year in which death occurs, and for the tax year prior to death. For information on death benefit payments and the reduction of federal estate taxes, see Publication 3920. However, the discussions in that publication under, Death Benefits and Estate Tax Reduction, should be modified for astronauts (e.g., by using the date of death of the astronaut rather than September 11, 2001).

If any of these tax-forgiveness situations applies to a prior year tax, any tax paid for which the period for filing a claim has not ended will be credited or refunded. If any tax is still due, it will be canceled. The normal period for filing a claim for credit or refund is 3 years after the return was filed or 2 years after the tax was paid, whichever is later.

If death occurred in a combat zone or from wounds, disease, or injury incurred in a combat zone, the period for filing the claim is extended by:

Qualified hospitalization means any hospitalization outside the United States and any hospitalization in the United States of not more than 5 years.

This extended period for filing the claim also applies to a member of the Armed Forces who was deployed outside the United States in a designated contingency operation.

Joint return by surviving spouse.   A surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years, as explained under Qualifying widows and widowers, later.

Decedent as your dependent.   If the decedent qualified as your dependent for a part of the year before death, you can claim the exemption for the dependent on your tax return, regardless of when death occurred during the year.

  If the decedent was your qualifying child, you may be able to claim the child tax credit or the earned income credit.

Qualifying widows and widowers.   If your spouse died within the 2 tax years preceding the year for which your return is being filed, you may be eligible to claim the filing status of qualifying widow(er) with dependent child and qualify to use the Married filing jointly tax rates.

Requirements.   Generally, you qualify for this special benefit if you meet all of the following requirements.

Figuring your tax.   Check the box on line 5 (Form 1040 or 1040A) under filing status on your tax return and enter the year of death in the parentheses. Use the Tax Rate Schedule or the column in the Tax Table for Married filing jointly, which gives you the split-income benefits.

  The last year you can file jointly with, or claim an exemption for, your deceased spouse is the year of death.

Joint return filing rules.   If you are the surviving spouse and a personal representative is handling the estate for the decedent, you should coordinate filing your return for the year of death with this personal representative. See Joint Return earlier under Final Return for Decedent.

Income in respect of a decedent must be included in the income of one of the following:

If you have to include income in respect of a decedent in your gross income and an estate tax return (Form 706) was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income. See Estate Tax Deduction, later.

This section explains and provides examples of some specific types of income in respect of a decedent.

Depletion.   The deduction for percentage depletion is allowable only to the person (estate or beneficiary) who receives income in respect of a decedent to which the deduction relates, whether or not that person receives the property from which the income is derived. An heir who (because of the decedent's death) receives income as a result of the sale of units of mineral by the decedent (who used the cash method) will be entitled to the depletion allowance for that income. If the decedent had not figured the deduction on the basis of percentage depletion, any depletion deduction to which the decedent was entitled at the time of death would be allowable on the decedent's final return, and no depletion deduction in respect of a decedent would be allowed to anyone else.

  For more information about depletion, see chapter 10 in Publication 535, Business Expenses.

To figure a recipient's estate tax deduction, determine:

The proceeds from a decedent's life insurance policy paid by reason of his or her death generally are excluded from income. The exclusion applies to any beneficiary, whether a family member or other individual, a corporation, or a partnership.

Your basis in property you inherit from a decedent is generally one of the following:

Public safety officers.   Special rules apply to certain amounts received because of the death of a public safety officer (law enforcement officers, fire fighters, chaplains, ambulance crews, and rescue squads).

Death benefits.   The death benefit payable to eligible survivors of public safety officers who die as a result of traumatic injuries sustained in the line of duty is not included in either the beneficiaries' income or the decedent's gross estate. The benefit is administered through the Bureau of Justice Assistance (BJA).

  The BJA can pay the eligible survivors an emergency interim benefit up to $3,000 if it determines that a public safety officer's death is one for which a death benefit will probably be paid. If there is no final payment, the recipient of the interim benefit is liable for repayment. However, the BJA may waive all or part of the repayment if it will cause a hardship. If all or part of the repayment is waived, that amount is not included in income.

Survivor benefits.   Generally, a survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty is excluded from the recipient's income. The annuity must be provided under a government plan and is excludable to the extent that it is attributable to the officer's service as a public safety officer.

  The exclusion does not apply if the recipient's actions were responsible for the officer's death. It also does not apply in the following circumstances.

Salary or wages.   Salary or wages paid after the employee's death are usually taxable income to the beneficiary. See Wages, earlier, under Specific Types of Income in Respect of a Decedent.

Rollover distributions.   An employee's surviving spouse who receives an eligible rollover distribution may roll it over tax free into an IRA, a qualified plan, a section 403 annuity, or a section 457 plan. A distribution to a beneficiary other than the employee's surviving spouse is not an eligible rollover distribution and is subject to tax. If the decedent was born before January 2, 1936, the beneficiary may be able to use optional methods to figure the tax on the distribution. For more information, see Publication 575, Pension and Annuity Income.

Pensions and annuities.   For beneficiaries who receive pensions and annuities, see Publication 575. For beneficiaries of federal Civil Service employees or retirees, see Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.

Inherited IRAs.   If a person other than the decedent's spouse inherits the decedent's traditional IRA or Roth IRA, that person cannot treat the IRA as one established on his or her behalf. If a distribution from a traditional IRA is from contributions that were deducted or from earnings and gains in the IRA, it is fully taxable income. If there were nondeductible contributions, an allocation between taxable and nontaxable income must be made. For information on distributions from a Roth IRA, see the discussion earlier under Income in Respect of a Decedent. The inherited IRA cannot be rolled over into, or receive a rollover from, another IRA. No deduction is allowed for amounts paid into that inherited IRA. For more information about IRAs, see Publication 590.

Estate income.   Estates may have to pay federal income tax. Beneficiaries may have to pay tax on their share of estate income. However, there is never a double tax. See Distributions to Beneficiaries From an Estate, later.

As personal representative, you must file a separate Schedule K-1 (Form 1041), or an acceptable substitute (described below), for each beneficiary. File these schedules with Form 1041.

You must show each beneficiary's taxpayer identification number. A $50 penalty is charged for each failure to provide the identifying number of each beneficiary unless reasonable cause is established for not providing it. When you assume your duties as the personal representative, you must ask each beneficiary to give you a taxpayer identification number (TIN). A nonresident alien beneficiary that gives you a withholding certificate generally must provide you with a TIN (see Publication 515). A TIN is not required for an executor or administrator of the estate unless that person is also a beneficiary.

As personal representative, you must also furnish a Schedule K-1 (Form 1041), or a substitute, to the beneficiary by the date on which the Form 1041 is filed. Failure to provide this payee statement can result in a penalty of $50 for each failure. This penalty also applies if you omit information or include incorrect information on the payee statement.

You do not need prior approval for a substitute Schedule K-1 (Form 1041) that is an exact copy of the official schedule or that follows the specifications in Publication 1167, General Rules and Specifications for Substitute Forms and Schedules. You must have prior approval for any other substitute Schedule K-1 (Form 1041).

If you have to file an amended Form 1041, use a copy of the form for the appropriate year and check the Amended return box. Complete the entire return, correct the appropriate lines with the new information, and refigure the tax liability. On an attached sheet, explain the reason for the changes and identify the lines and amounts changed.

If the amended return results in a change to income, or a change in distribution of any income or other information provided to a beneficiary, you must file an amended Schedule K-1 (Form 1041) and give a copy to each beneficiary. Check the Amended K-1 box at the top of Schedule K-1.

Even though you may not have to file an income tax return for the estate, you may have to file Form 1099-DIV, Form 1099-INT, or Form 1099-MISC if you receive the income as a nominee or middleman for another person. For more information on filing information returns, see the General Instructions for Forms 1099, 1098, 5498, and W-2G.

You will not have to file information returns for the estate if the estate is the owner of record and you file an income tax return for the estate on Form 1041 giving the name, address, and identifying number of each actual owner and furnish a completed Schedule K-1 (Form 1041) to each actual owner.

If property is located outside the state in which the decedent's home was located, more than one personal representative may be designated by the will or appointed by the court. The person designated or appointed to administer the estate in the state of the decedent's permanent home is called the “domiciliary representative.” The person designated or appointed to administer property in a state other than that of the decedent's permanent home is called an “ancillary representative.”

You do not have to file a copy of the decedent's will unless requested by the IRS. If requested, you must attach a statement to it indicating the provisions that, in your opinion, determine how much of the estate's income is taxable to the estate or to the beneficiaries. You should also attach a statement signed by you under penalties of perjury that the will is a true and complete copy.

Income in respect of a decedent.   As the personal representative of the estate, you may receive income that the decedent would have reported had death not occurred. For an explanation of this income, see Income in Respect of a Decedent under Other Tax Information, earlier. An estate may qualify to claim a deduction for estate taxes if the estate must include in gross income for any tax year an amount of income in respect of a decedent. See Estate Tax Deduction, earlier, under Other Tax Information.

Gain (or loss) from sale of property.   During the administration of the estate, you may find it necessary or desirable to sell all or part of the estate's assets to pay debts and expenses of administration, or to make proper distributions of the assets to the beneficiaries. While you may have the legal authority to dispose of the property, title to it may be vested (given a legal interest in the property) in one or more of the beneficiaries. This is usually true of real property. To determine whether any gain or loss must be reported by the estate or by the beneficiaries, consult local law to determine the legal owner.

Redemption of stock to pay death taxes.   Under certain conditions, a distribution to a shareholder (including the estate) in redemption of stock that was included in the decedent's gross estate may be allowed capital gain (or loss) treatment.

Character of asset.   The character of an asset in the hands of an estate determines whether gain or loss on its sale or other disposition is capital or ordinary. The asset's character depends on how the estate holds or uses it. If it was a capital asset to the decedent, it generally will be a capital asset to the estate. If it was land or depreciable property used in the decedent's business and the estate continues the business, it generally will have the same character to the estate that it had in the decedent's hands. If it was held by the decedent for sale to customers, it generally will be considered to be held for sale to customers by the estate if the decedent's business continues to operate during the administration of the estate.

Holding period.   An estate (or other recipient) that acquires a capital asset from a decedent and sells or otherwise disposes of it is considered to have held that asset for more than 1 year, regardless of how long the asset is held.

Basis of asset.   The basis used to figure gain or loss for property the estate receives from the decedent usually is its fair market value at the date of death. See Basis of Inherited Property under Other Tax Information, earlier, for other basis in inherited property.

  If the estate purchases property after the decedent's death, the basis generally will be its cost.

  The basis of certain appreciated property the estate receives from the decedent will be the decedent's adjusted basis in the property immediately before death. This applies if the property was acquired by the decedent as a gift during the 1-year period before death, the property's fair market value on the date of the gift was greater than the donor's adjusted basis, and the proceeds of the sale of the property are distributed to the donor (or the donor's spouse).

Schedule D (Form 1041).   To report gains (and losses) from the sale or exchange of capital assets by the estate, file Schedule D (Form 1041), Capital Gains and Losses, with Form 1041. For additional information about the treatment of capital gains and losses, see the instructions for Schedule D (Form 1041).

Installment obligations.   If an installment obligation owned by the decedent is transferred by the estate to the obligor (buyer or person obligated to pay) or is canceled at death, include the income from that event in the gross income of the estate. See Installment obligations under Income in Respect of the Decedent, earlier. See Publication 537 for information about installment sales.

Gain from sale of special-use valuation property.   If you elected special-use valuation for farm or other closely held business real property and that property is sold to a qualified heir, the estate will recognize gain on the sale if the fair market value on the date of the sale exceeds the fair market value on the date of the decedent's death (or on the alternate valuation date if it was elected).

Qualified heirs.   Qualified heirs include the decedent's ancestors (parents, grandparents, etc.) and spouse, the decedent's lineal descendants (children, grandchildren, etc.) and their spouses, and lineal descendants (and their spouses) of the decedent's parents or spouse.

  For more information about special-use valuation, see Form 706 and its instructions.

Gain from transfer of property to a political organization.   Appreciated property transferred to a political organization is treated as sold by the estate. Appreciated property is property that has a fair market value (on the date of the transfer) greater than the estate's basis. The gain recognized is the difference between the estate's basis and the fair market value on the date transferred.

  A political organization is any party, committee, association, fund, or other organization formed and operated to accept contributions or make expenditures for influencing the nomination, election, or appointment of an individual to any federal, state, or local public office.

Gain or loss on distributions in kind.   An estate recognizes gain or loss on a distribution of property in kind to a beneficiary only in the following situations. The gain or loss is usually the difference between the fair market value of the property when distributed and the estate's basis in the property. However, see Gain from sale of special-use valuation property, earlier, for a limit on the gain recognized on a transfer of such property to a qualified heir.

  If you choose to recognize gain or loss, the choice applies to all noncash distributions during the tax year except charitable distributions and specific bequests. To make the choice, report the transaction on Schedule D (Form 1041) attached to the estate's Form 1041 and check the box on line 7 in the “Other Information” section of Form 1041. You must make the choice by the due date (including extensions) of the estate's income tax return for the year of distribution. However, if you timely filed your return for the year without making the choice, you can still make the choice by filing an amended return within six months of the due date of the return (excluding extensions). Attach Schedule D (Form 1041) to the amended return and write “Filed pursuant to section 301.9100-2” on the form. File the amended return at the same address you filed the original return. You must get the consent of the IRS to revoke the choice.

  For more information, see Property distributed in kind under Distributions Deduction, later.

  

Under the related persons rules, you cannot claim a loss for property distributed to a beneficiary unless the distribution is in discharge of a pecuniary bequest. Also, any gain on the distribution of depreciable property is ordinary income.

An estate is allowed an exemption deduction of $600 in figuring its taxable income. No exemption for dependents is allowed to an estate. Even though the first return of an estate may be for a period of less than 12 months, the exemption is $600. If, however, the estate was given permission to change its accounting period, the exemption is $50 for each month of the short year.

An estate qualifies for a deduction for amounts of gross income paid or permanently set aside for qualified charitable organizations. The adjusted gross income limits for individuals do not apply. However, to be deductible by an estate, the contribution must be specifically provided for in the decedent's will. If there is no will, or if the will makes no provision for the payment to a charitable organization, then a deduction will not be allowed even though all of the beneficiaries may agree to the gift.

You cannot deduct any contribution from income not included in the estate's gross income. If the will specifically provides that the contributions are to be paid out of the estate's gross income, the contributions are fully deductible. However, if the will contains no specific provisions, the contributions are considered to have been paid and are deductible in the same proportion as the gross income bears to the total of all classes (taxable and nontaxable) of income.

You cannot deduct a qualified conservation easement granted after the date of death and before the due date of the estate tax return. A contribution deduction is allowed to the estate for estate tax purposes.

For more information about contributions, see Publication 526, Charitable Contributions, and Publication 561, Determining the Value of Donated Property.

Generally, an estate can claim a deduction for a loss it sustains on the sale of property. This includes a loss from the sale of property (other than stock) to a personal representative of the estate, unless that person is a beneficiary of the estate.

For a discussion of an estate's recognized loss on a distribution of property in kind to a beneficiary, see Income To Include, earlier.

An estate and a beneficiary of that estate are generally treated as related persons for purposes of the disallowance of a loss on the sale of an asset between related persons. The disallowance does not apply to a sale or exchange made to satisfy a pecuniary bequest.

Expenses of administering an estate can be deducted either from the gross estate in figuring the federal estate tax on Form 706 or from the estate's gross income in figuring the estate's income tax on Form 1041. However, these expenses cannot be claimed for both estate tax and income tax purposes. In most cases, this rule also applies to expenses incurred in the sale of property by an estate (not as a dealer).

To prevent a double deduction, amounts otherwise allowable in figuring the decedent's taxable estate for federal estate tax on Form 706 will not be allowed as a deduction in figuring the income tax of the estate or of any other person unless the personal representative files a statement, in duplicate, that the items of expense, as listed in the statement, have not been claimed as deductions for federal estate tax purposes and that all rights to claim such deductions are waived. One deduction or part of a deduction can be claimed for income tax purposes if the appropriate statement is filed, while another deduction or part is claimed for estate tax purposes. Claiming a deduction in figuring the estate income tax is not prevented when the same deduction is claimed on the estate tax return so long as the estate tax deduction is not finally allowed and the preceding statement is filed. The statement can be filed with the income tax return or at any time before the expiration of the statute of limitations that applies to the tax year for which the deduction is sought. This waiver procedure also applies to casualty losses incurred during administration of the estate.

The allowable deductions for depreciation and depletion that accrue after the decedent's death must be apportioned between the estate and the beneficiaries, depending on the income of the estate that is allocable to each.

An estate is allowed a deduction for the tax year for any income that must be distributed currently and for other amounts that are properly paid, credited, or required to be distributed to beneficiaries. The deduction is limited to the distributable net income of the estate.

For special rules that apply in figuring the estate's distribution deduction, see Bequest under Distributions to Beneficiaries From an Estate, later.

If the personal representative has discretion as to when the income is distributed, the deduction is allowed only in the year of distribution.

The personal representative can elect to treat distributions paid or credited within 65 days after the close of the estate's tax year as having been paid or credited on the last day of that tax year. The election is made by completing line 6 in the “Other Information” section of Form 1041. If a tax return is not required, the election is made on a statement filed with the IRS office where the return would have been filed. The election is irrevocable for the tax year and is only effective for the year of the election.

No deduction can be taken for funeral expenses or medical and dental expenses on the estate's income tax return, Form 1041.

Estates generally are allowed some of the same tax credits that are allowed to individuals. The credits generally are allocated between the estate and the beneficiaries. However, estates are not allowed the credit for the elderly or the disabled, the child tax credit, or the earned income credit discussed earlier under Final Return for Decedent.

An estate cannot use the Tax Table that applies to individuals. The tax rate schedule to use is in the instructions for Form 1041.

The estate's income tax liability must be paid in full when the return is filed. You may have to pay estimated tax, however, as explained below.

Signature.   The personal representative (or its authorized officer if the personal representative is not an individual) must sign the return. An individual who prepares the return for pay must sign the return as preparer. You can check a box in the signature area that authorizes the IRS to contact that paid preparer for certain information. See the instructions for Form 1041 for more information.

When to file.   If you choose the calendar year as the estate's accounting period, the Form 1041 for 2004 is due by April 15, 2005 (June 15, 2005, in the case of Form 1040NR for a nonresident alien estate that does not have an office in the United States). If you choose a fiscal year, the Form 1041 is due by the 15th day of the 4th month (6th month in the case of Form 1040NR) after the end of the tax year. If the due date is a Saturday, Sunday, or legal holiday, the form must be filed by the next business day.

Extension of time to file.   An extension of time to file Form 1041 may be granted if you have clearly described the reasons that will cause your delay in filing the return. Use Form 2758, Application for Extension of Time To File Certain Excise, Income, Information, and Other Returns, to request an extension. The extension is not automatic, so you should request it early enough for the IRS to act on the application before the regular due date of Form 1041. You should file Form 2758 in duplicate with the IRS office where you must file Form 1041.

  Generally, an extension of time to file a return does not extend the time for payment of tax due. You must pay the total income tax estimated to be due on Form 1041 in full by the regular due date of the return. For additional information, see the instructions for Form 2758.

Where to file.   As the personal representative of an estate, file the estate's income tax return (Form 1041) with the Internal Revenue Service Center for the state where you live or have your principal place of business. A list of the states and addresses that apply is in the instructions for Form 1041.

  You must send Form 1040NR to the Internal Revenue Service Center, Philadelphia, PA 19255.

Electronic filing.   Form 1041 can be filed electronically or on magnetic media. See the instructions for Form 1041 for more information.

Annuity payable out of income or corpus.   Income that must be distributed currently includes any amount that must be paid out of income or corpus (principal of the estate) to the extent the amount is satisfied out of income for the tax year. An annuity that must be paid in all events (either out of income or corpus) would qualify as income that must be distributed currently to the extent there is income of the estate not paid, credited, or required to be distributed to other beneficiaries for the tax year.

The following are examples of other amounts distributed.    If an estate distributes property in kind, the amount of the distribution ordinarily is the lesser of the estate's basis in the property or the property's fair market value when distributed. However, the amount of the distribution is the property's fair market value if the estate recognizes gain on the distribution. See Gain or loss on distributions in kind in the discussion Income To Include under Income Tax Return of an Estate—Form 1041, earlier.

No charitable contribution made.   If no charitable contribution is made during the tax year, you must treat the distributions as consisting of the same proportion of each class of items entering into the computation of distributable net income as the total of each class bears to the total distributable net income. Distributable net income was defined earlier in Distributions Deduction under Income Tax Return of an Estate—Form 1041. However, if the will or local law specifically provides or requires a different allocation, you must use that allocation.

Charitable contribution made.   If a charitable contribution is made by an estate and the terms of the will or local law provide for the contribution to be paid from specified sources, that provision governs. If no provision or requirement exists, the charitable contribution deduction must be allocated among the classes of income entering into the computation of the income of the estate before allocation of other deductions among the items of distributable net income. In allocating items of income and deductions to beneficiaries to whom income must be distributed currently, the charitable contribution deduction is not taken into account to the extent that it exceeds income for the year reduced by currently distributable income.

How to report estate income.   Each item of income keeps the same character in your hands as it had in the hands of the estate. If the items of income distributed or considered to be distributed to you include dividends, tax-exempt interest, or capital gains, they will keep the same character in your hands for purposes of the tax treatment given those items. Generally, you report the dividends on line 9a of your Form 1040, and the capital gains on your Schedule D (Form 1040). The tax-exempt interest, while not included in taxable income, must be shown on line 8b of your Form 1040. Report business and other nonpassive income in Part III of your Schedule E (Form 1040).

  The estate's personal representative should provide you with the classification of the various items that make up your share of the estate income and the credits you should take into consideration so you can properly prepare your individual income tax return. See Schedule K-1 (Form 1041), later.

When to report estate income.   If income from the estate is credited or must be distributed to you for a tax year, report that income (even if not distributed) on your return for that year. The personal representative can elect to treat distributions paid or credited within 65 days after the close of the estate's tax year as having been paid or credited on the last day of that tax year. If this election is made, you must report that distribution on your return for that year.

  Report other income from the estate on your return for the year in which you receive it. If your tax year is different from the estate's tax year, see Different tax years, next.

Different tax years.   You must include your share of the estate income in your return for your tax year in which the last day of the estate's tax year falls. If the tax year of the estate is the calendar year and your tax year is a fiscal year ending on June 30, you will include in gross income for the tax year ended June 30 your share of the estate's distributable net income distributed or considered distributed during the calendar year ending the previous December 31.

Death of individual beneficiary.   If an individual beneficiary dies, the beneficiary's share of the estate's distributable net income may be distributed or be considered distributed by the estate for its tax year that does not end with or within the last tax year of the beneficiary. In this case, the estate income that must be included in the gross income on the beneficiary's final return is based on the amounts distributed or considered distributed during the tax year of the estate in which his or her last tax year ended. However, for a cash basis beneficiary, the gross income of the last tax year includes only the amounts actually distributed before death. Income that must be distributed to the beneficiary but, in fact, is distributed to the beneficiary's estate after death is included in the gross income of the beneficiary's estate as income in respect of a decedent.

Termination of nonindividual beneficiary.   If a beneficiary that is not an individual, for example a trust or a corporation, ceases to exist, the amount included in its gross income for its last tax year is determined as if the beneficiary were a deceased individual. However, income that must be distributed before termination, but which is actually distributed to the beneficiary's successor in interest, is included in the gross income of the nonindividual beneficiary for its last tax year.

Schedule K-1 (Form 1041).   The personal representative for the estate must provide you with a copy of Schedule K-1 (Form 1041) or a substitute Schedule K-1. You should not file the form with your Form 1040, but should keep it for your personal records.

  Each beneficiary (or nominee of a beneficiary) who receives a distribution from the estate for the tax year or to whom any item is allocated must receive a Schedule K-1 or substitute. The personal representative handling the estate must furnish the form to each beneficiary or nominee by the date on which the Form 1041 is filed.

Nominees.   A person who holds an interest in an estate as a nominee for a beneficiary must provide the estate with the name and address of the beneficiary, and any other required information. The nominee must provide the beneficiary with the information received from the estate.

Penalty.   A personal representative (or nominee) who fails to provide the correct information may be subject to a $50 penalty for each failure.

Consistent treatment of items.   You must treat estate items the same way on your individual return as they are treated on the estate's income tax return. If your treatment is different from the estate's treatment, you must file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with your return to identify the difference. If you do not file Form 8082 and the estate has filed a return, the IRS can immediately assess and collect any tax and penalties that result from adjusting the item to make it consistent with the estate's treatment.

Specific sum of money or property.   To meet this test, the amount of money or the identity of the specific property must be determinable under the decedent's will as of the date of death. To qualify as specific property, the property must be identifiable both as to its kind and its amount.

Distributions not treated as bequests.   The following distributions are not bequests that meet all the requirements listed earlier that allow a distribution to be excluded from the beneficiary's income and do not allow it as a deduction to the estate.

Paid only from income.   An amount that can be paid only from current or prior income of the estate does not qualify even if it is specific in amount and there is no provision for installment payments.

Annuity.   An annuity or a payment of money or of specific property in lieu of, or having the effect of, an annuity is not the payment of specific property or a sum of money.

Residuary estate.   If the will provides for the payment of the balance or residue of the estate to a beneficiary of the estate after all expenses and other specific legacies or bequests, that residuary bequest is not a payment of specific property or a sum of money.

Gifts made in installments.   Even if the gift or bequest is made in a lump sum or in three or fewer installments, it will not qualify as specific property or a sum of money if the will provides that the amount must be paid in more than three installments.

Conditional bequests.   A bequest of specific property or a sum of money that may otherwise be excluded from the beneficiary's gross income will not lose the exclusion solely because the payment is subject to a condition.

Installment payments.   Certain rules apply in determining whether a bequest of specific property or a sum of money has to be paid or credited to a beneficiary in more than three installments.

Personal items.   Do not take into account bequests of articles for personal use, such as personal and household effects and automobiles.

Real property.   Do not take into account specifically designated real property, the title to which passes under local law directly to the beneficiary.

Other property.   All other bequests under the decedent's will for which no time of payment or crediting is specified and that are to be paid or credited in the ordinary course of administration of the estate are considered as required to be paid or credited in a single installment. Also, all bequests payable at any one specified time under the terms of the will are treated as a single installment.

Testamentary trust.   In determining the number of installments that must be paid or credited to a beneficiary, the decedent's estate and a testamentary trust created by the decedent's will are treated as separate entities. Amounts paid or credited by the estate and by the trust are counted separately.

The period of administration is the time actually required by the personal representative to assemble all of the decedent's assets, pay all the expenses and obligations, and distribute the assets to the beneficiaries. This may be longer or shorter than the time provided by local law for the administration of estates.

If the estate has unused loss carryovers or excess deductions for its last tax year, they are allowed to those beneficiaries who succeed to the estate's property. See Successor beneficiary, later.

When an estate terminates, the personal representative can choose to transfer to the beneficiaries the credit for all or part of the estate's estimated tax payments for the last tax year. To make this choice, the personal representative must complete Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries, and file it either separately or with the estate's final Form 1041. The Form 1041-T must be filed by the 65th day after the close of the estate's tax year.

The estimated tax allocated to each beneficiary is treated as paid or credited to the beneficiary on the last day of the estate's final tax year and must be reported on line 14a, Schedule K-1 (Form 1041). If the estate terminated in 2004, this amount is treated as a payment of 2004 estimated tax made by the beneficiary on January 15, 2005.

Deductions.   During the year, you received a bill from the hospital for $615 and bills from your father's doctors totaling $475. You paid these bills as they were presented. In addition, you find other bills from his doctors totaling $185 that your father paid in 2004 and receipts for prescribed drugs he purchased totaling $536. The funeral home presented you a bill for $6,890 for the expenses of your father's funeral, which you paid.

  The medical expenses you paid from the estate's funds ($615 and $475) were for your father's care and were paid within 1 year after his death. They will not be used to figure the taxable estate so you can treat them as having been paid by your father when he received the medical services. See Medical Expenses under Final Return for Decedent, earlier. However, you cannot deduct the funeral expenses either on your father's final return or on the estate's income tax return. They are deductible only on the federal estate tax return (Form 706).

  In addition, after going over other receipts and canceled checks for the tax year with your mother, you determine that the following items are deductible on your parents' 2004 income tax return.

  Rental expenses included real estate taxes of $700 and mortgage interest of $410. In addition, insurance premiums of $260 and painting and repair expenses for $350 were paid. These rental expenses totaled $1,720.

  Your mother and father owned the property as joint tenants with right of survivorship and they were the only joint tenants, so her basis in this property upon your father's death is $95,859. This is found by adding the $60,000 value of the half interest included in your father's gross estate to your mother's $45,000 share of the cost basis and subtracting your mother's $9,141 share of depreciation (including 2004 depreciation for the period before your father's death), as explained next.

  For 2004, you must make the following computations to figure the depreciation deduction.

  Show the total of the amounts in (1) and (2)(a), above, on line 17 of Form 4562, Depreciation and Amortization. Show the amount in (2)(b) on line 20c. The total depreciation deduction allowed for the year is $2,097.

Filing status.   After December 31, 2004, when your mother determines the amount of her income, you and your mother must decide whether you will file a joint return or separate returns for your parents for 2004. Your mother has rental income and $400 of interest income from her savings account at the Mayflower Bank of Juneville, so it appears to be to her advantage to file a joint return.

Tax computation.   The illustrations of Form 1040 and related schedules appear near the end of this publication. These illustrations are based on information in this example. The tax refund is $212. The computation is as follows:

2004 income tax return.   Having determined the tax liability for your father's final return, you now figure the estate's taxable income. You decide to use the calendar year and the cash method of accounting to report the estate's income. This return also is due by April 15, 2005.

  In addition to the amount you received from your father's employer for unpaid salary and for vacation pay ($12,000) entered on line 8 (Form 1041), you received a dividend check from the XYZ Company on June 17, 2004. The check was for $750 and you enter it on line 2a (Form 1041). The amount is a qualified dividend and you show the allocation to the beneficiaries and the estate on line 2b. The amount allocated to the beneficiary ($121) is based on the distributable dividend income before any deductions. The estate received a Form 1099-INT showing $2,250 interest paid by the bank on the savings account in 2004 after your father died. Show this amount on line 1 (Form 1041).

  In September, a local coin collector offered you $3,000 for your father's coin collection. Your mother was not interested in keeping the collection, so you accepted the offer and sold him the collection on September 23, 2004.

  You will have to report the sale on Schedule D (Form 1041) when you file the income tax return of the estate. The estate has a capital gain of $200 from the sale of the coins. The gain is the excess of the sale price, $3,000, over the value of the collection at the date of your father's death, $2,800. See Gain (or loss) from sale of property under Income Tax Return of an Estate—Form 1041 and its discussion, Income To Include, earlier.

Deductions.   In November 2004, you received a bill for the real estate taxes on your parents' home. The bill was for $2,250, which you paid. Include real estate taxes on line 11 (Form 1041). Real estate tax on the rental property was $700; this amount, however, is reflected on Schedule E (Form 1040).

  You paid $325 for attorney's fees in connection with administration of the estate. This is an expense of administration and is deducted on line 14 (Form 1041). You must, however, file with the return a statement in duplicate that such expense has not been claimed as a deduction from the gross estate for figuring the federal estate tax on Form 706, and that all rights to claim that deduction on Form 706 are waived.

Distributions.   You made a distribution of $2,000 to your father's brother, James. The distribution was made from current income of the estate under the terms of the will.

  The income distribution deduction ($2,000) is figured on Schedule B of Form 1041 and deducted on line 18 (Form 1041).

  The distribution of $2,000 must be allocated and reported on Schedule K-1 (Form 1041) as follows:

  The estate took an income distribution deduction, so you must prepare Schedule I (Form 1041), Alternative Minimum Tax, regardless of whether the estate is liable for the alternative minimum tax.

  The other distribution you made out of the assets of the estate in 2004 was the transfer of the automobile to your mother on July 1. This is included in the bequest of property, so it is not taken into account in computing the distributions of income to the beneficiary. The life insurance proceeds of $275,000 paid directly to your mother by the insurance company are not an asset of the estate.

Tax computation.   The taxable income of the estate for 2004 is $10,025, figured as follows:

  The estate had a net capital gain and taxable income, so you use the Schedule D Tax Worksheet to figure the tax, $2,502, for 2004.

Note.   For purpose of this example, we have illustrated the filled-in worksheet. You would not file the worksheet with the return. You would keep the worksheet for your records.

2005 income tax return for estate.   On January 7, 2005, you receive a dividend check from the XYZ Company for $500. You also have interest posted to the savings account in January totaling $350. On January 28, 2005, you make a final accounting to the court and obtain permission to close the estate. In the accounting, you list $1,650 as the balance of the expense of administering the estate.

  You advise the court that you plan to pay $5,000 to Hometown Church under the provisions of the will, and that you will distribute the balance of the property to your mother, the remaining beneficiary.

Gross income.   After making the distributions already described, you can wind up the affairs of the estate. The gross income of the estate for 2005 is more than $600, so you must file an income tax return, Form 1041, for 2005 (not shown). The estate's gross income for 2005 is $850 (dividends $500 and interest $350).

Deductions.   After making the following computations, you determine that none of the distributions made to your mother must be included in her taxable income for 2005.

  Note that because the contribution of $5,000 to Hometown Church was not required under the terms of the will to be paid out of the gross income of the estate, it is not deductible and was not included in the computation.

  The estate had no distributable net income in 2005, so none of the distributions made to your mother have to be included in her gross income. Furthermore, because the estate in the year of termination had deductions in excess of its gross income, the excess of $800 will be allowed as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit to your mother on her individual return for the year 2005, if she itemizes deductions.

Termination of estate.   You have made the final distribution of the assets of the estate and you are now ready to terminate the estate. You must notify the IRS, in writing, that the estate has been terminated and that all of the assets have been distributed to the beneficiaries. Form 56 can be used for this purpose. Be sure to report the termination to the IRS office where you filed Form 56 and to include the employer identification number on this notification.