Do I Need to File an Estate Tax Return?

After losing a loved one the last thing on your mind may be filing taxes; however, it is still your responsibility to file the proper tax returns by the IRS-established deadlines. One of those returns may be a Federal or state estate tax return for your late spouse. Most will never have to file the federal estate tax return; however, some will have to file the state estate tax return if you live in one of the twelve states (and the District of Columbia) that impose an estate tax. It is critical that you know if you are required to file estate tax return(s).

What is an estate?

The gross estate of the deceased consists of all assets they held at the date of death (or six months later at the “alternate valuation date”). The net estate is the economic value of all assets minus credits, deductions, and liabilities.

Assets in an estate can include properties that are wholly owned by the decedent, as well as those in which the decedent held only a partial equity interest. This might be the case with jointly-owned property held with a spouse. In this case, 50% of the property’s value would be attributable to the decedent’s estate.

Assets that are subject to probate are factored into the net calculation, as well as assets held in revocable living trusts. Assets held in an irrevocable trust are not part of the decedent’s estate for tax purposes.

Estate liabilities are debts owed by the decedent, such as credit card balances and mortgages. The costs incurred in processing an estate are also deductible, as are state-level estate taxes when you’re calculating taxes at the federal level. Gifts made to charities and the value of assets transferred to a spouse can also be deducted.

What is an estate tax?

An estate tax, also known as the “death tax,” is a term used to describe the tax levied by the Federal government and/or a state on the net value of an individual’s taxable estate. An estate tax is paid by the estate itself before assets are distributed to heirs.  

How much of the estate is taxed?

Most will not need to worry about the federal estate tax. This is because Federal law allows estates to exclude up to $12.06 million for individuals and $24.12 million for married couples in 2022 (up from $11.70 million and $23.40 million, respectively, for the 2021 tax year). The tax only applies to amounts greater than these exemption thresholds. So, only very wealthy estates will have to file. This threshold is indexed for inflation, so it may increase incrementally each year. The top federal statutory estate tax rate is 40%.

Each state, however, is allowed to set their own exemption thresholds. Massachusetts and Oregon have the lowest thresholds at $1 million; Connecticut has the highest at $7.1 million. For more information about the estate tax rates for the twelve states and the District of Columbia that impose estate taxes, visit www.taxfoundation.org.  

How is an estate tax return completed?

IRS Form 706, officially called the United States Estate (and Generation-Skipping Transfer) Tax Return, is required by the federal government if an estate exceeds the aforementioned exemption thresholds. Again, most will never have to worry about this form.  

IRS Form 706 must generally be filed along with any tax due within nine months of the decedent’s date of death. States require that estates prepare and file IRS Form 706 at the state level, along with all necessary state estate tax forms, even if Form 706 isn’t filed with the federal government.

If the decedent’s estate is large enough to warrant filing estate tax returns, you are likely already working with a tax professional. If for some reason you are not, find one immediately. There are many strategies for reducing the taxable estate before and after death and the complexity of this particular tax requires working with an estate tax professional. Please do not go it alone!