Understanding Estate, Inheritance & Final Taxes

The Taxes After Death Hub

After someone passes away, their financial obligations don’t disappear. Understanding how estate, inheritance, and final income taxes work is essential for executors, heirs, and beneficiaries. Proper tax planning ensures that estates are settled efficiently, assets are distributed correctly, and unnecessary penalties or legal issues are avoided. Whether you’re preparing your own estate or managing a loved one’s affairs, knowing the tax implications can help prevent costly mistakes.

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Table of Contents

Key Things To Know

Handling taxes after death requires careful planning and legal compliance. Here’s what to keep in mind.

  • A final income tax return must be filed: The deceased’s last income tax return (Form 1040) is typically due by Tax Day of the following year.
  • Estate taxes apply above certain thresholds: Federal and some state estate taxes may apply if the estate's total value exceeds the exemption limit.
  • Inheritance taxes vary by state: Some states impose inheritance taxes on beneficiaries, depending on their relationship to the deceased.
  • Debts and taxes must be settled before distributing assets: Executors must ensure all outstanding tax obligations are paid before heirs receive their inheritance.
  • Proper estate planning can reduce tax burdens: Trusts, gifting strategies, and tax-efficient planning can help minimize estate and inheritance taxes.

Checklists, Guides, & Resources

Buried in Work offers a variety of checklists, guides, and other resources. Below are some of the most popular ones related to this information hub.

Guide

Introduction to Estate Taxes

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Frequently Asked Questions

Have questions about tax obligations after death? Here are answers to common concerns.

General Information

Final taxes refer to the various tax obligations that must be settled after someone passes away. These may include income taxes on their final return, estate taxes, and any applicable inheritance taxes for beneficiaries.

The executor or personal representative of the estate is typically responsible for filing final tax returns, paying any outstanding taxes, and ensuring compliance with federal and state tax laws. If no executor is named, a court-appointed administrator may handle these obligations.

Outstanding taxes must be paid from the estate before assets are distributed to heirs. If the estate does not have enough funds to cover tax liabilities, certain assets may need to be sold to satisfy the debt. Beneficiaries generally do not inherit tax debts unless they received assets that bypassed the estate and had unpaid tax liabilities attached.

Estate & Inheritance Taxes

The estate tax is a tax imposed on the total value of a deceased person’s assets before they are distributed to heirs. It applies only if the estate exceeds federal or state exemption thresholds.

For 2024, the federal estate tax exemption is $13.61 million per individual and is expected to rise to $13.99 million in 2025. However, unless Congress takes action, the exemption will drop significantly after 2025, potentially to around $7 million per individual (adjusted for inflation). Estates valued below these amounts are not subject to federal estate tax.

Some states impose their own estate or inheritance taxes with much lower exemption thresholds. For example, Massachusetts has a $2 million state estate tax exemption.

  • Estate tax is paid by the estate before assets are distributed to heirs.
  • Inheritance tax is paid by the person receiving the inheritance and applies only in certain states.

  • States with estate taxes: Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Maine, New York, Connecticut, Rhode Island, Massachusetts, Hawaii, and the District of Columbia.
  • States with inheritance taxes: Iowa (phasing out by 2025), Kentucky, Maryland (the only state with both estate and inheritance taxes), Nebraska, New Jersey, and Pennsylvania.

Several strategies may help reduce estate tax liability, including:

  • Gifting assets during your lifetime to reduce the estate’s taxable value
  • Creating trusts, such as an irrevocable life insurance trust (ILIT)
  • Taking advantage of portability, which allows a surviving spouse to use the deceased spouse’s unused exemption

Life insurance proceeds are generally not subject to income tax, but they may be included in the estate’s taxable value if the deceased owned the policy. Transferring ownership to an irrevocable life insurance trust (ILIT) can help exclude them from estate tax calculations.

It depends on how the property is titled:

  • Joint Tenancy with Right of Survivorship: The deceased’s share is typically excluded from probate but may still be subject to estate tax.
  • Tenancy in Common: The deceased’s share is part of the taxable estate and subject to probate.

Final Tax Returns

  • Final Individual Income Tax Return (Form 1040): Covers income earned from January 1 until the date of death.
  • Estate Income Tax Return (Form 1041): Required if the estate earns more than $600 in income after death.
  • Federal Estate Tax Return (Form 706): Required only if the estate exceeds the federal exemption threshold.

  • The final individual tax return (Form 1040) is due on April 15 of the year following the person’s death.
  • The estate income tax return (Form 1041) follows a fiscal year timeline but is typically due April 15 if the estate uses a calendar year.
  • Estate tax (Form 706) is due nine months after death, with a six-month extension available for filing (though taxes owed must be paid on time).

  • Cash inheritances are generally not taxed.
  • Inherited retirement accounts (401(k), IRA, etc.) may be subject to income tax when withdrawn, depending on the account type and the heir’s relationship to the deceased.
  • Inherited property may trigger capital gains tax if sold for more than its "stepped-up" value at the time of inheritance.

While not legally required, working with an estate attorney, CPA, or tax professional is highly recommended to ensure compliance with tax laws and identify opportunities for tax savings.

You can calculate your estate's estimated tax liability by totaling your assets and checking federal and state exemption thresholds. Consulting a tax professional or estate planning attorney can provide a more accurate assessment and potential tax-saving strategies.

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Disclaimer: The information provided on this website and by Buried in Work is for general informational purposes only and should not be considered legal advice. Please consult with a qualified attorney or subject matter expert for advice specific to your situation.