What are the Taxes that Affect a Person’s Estate?

Tax season is over, but you may still have questions about taxes that affect estates and estate planning, including gift taxes, estate taxes, and income tax planning. You may also wonder if you should be engaging in estate tax planning. 

Gift Tax and Gift Tax Returns 

The federal gift tax may apply to gifts. Because the gift tax exemption and the estate tax exemption are the same exemption (the “Basic Exclusion Amount”), taxable gifts made during a person’s lifetime reduce that person’s ability to leave assets to others at death without estate taxes.  

The IRS defines a gift as any transfer of property (including but not limited to money) for which the transferor does not receive something of equal value in return. When gifting assets to others results in a taxable gift, the donor is generally responsible for paying the gift tax. 

To incur gift taxes, your giving generally needs to be at a substantial level. Most Americans do not need to be concerned about paying gift taxes because of two provisions of federal law: the gift tax annual exclusion and lifetime exemption 

For 2023, the gift tax annual exclusion amount was $17,000 (the gift tax annual exclusion is adjusted for inflation and is $18,000 for 2024). If you gave only outright gifts in 2023, and if you did not give more than a total of $17,000 worth of gifts to any one person in 2023, you likely do not need to file a gift tax return. However, if you did give more than $17,000 to any recipient in 2023, or if you made gifts that were not outright gifts, such as gifts to an irrevocable trust, you likely will need to file a gift tax return for 2023 to report your gifts.  

If you made taxable gifts in a given year, it’s still not likely you will actually have to pay gift taxes on those gifts. That’s because your lifetime exemption amount will generally apply to offset the gift taxes generated by the taxable gifts. Only after a donor has fully used the donor’s lifetime gift tax exemption will the donor have to actually pay gift taxes due as the result of taxable gifts. 

When a gift tax return is necessary, it’s due on the same date as the income tax return for that year (normally, April 15 of the following year). An extension of the due date for the income tax return for a given year also extends the due date for the gift tax return for that year. However, gift tax returns, unlike income tax returns, cannot be filed jointly. If a married couple made gifts, or if they want to gift split to take advantage of each member’s gift tax annual exclusion or lifetime exemption amount, each member of the couple must file a separate gift tax return. 

Income Tax Returns for a Deceased Person 

If a loved one has died, one of the tasks on a Will executor’s checklist is filing a final income tax return for that person. It’s important to note that the income tax return for the deceased, the estate’s income tax return, and an estate tax return are three separate things. 

If you’re the executor or administrator for your loved one’s estate, you’re required to file an income tax return for that person for the year of their death (IRS Form 1040). If the deceased person didn’t file a return for previous years and their income was high enough to require filing for any of those years, you will also likely need to complete and file income tax returns for each of those previous years. An income tax return for the year in which a person dies will not include the entire calendar year unless the person died on December 31—it will only cover the period from January 1 through the actual date of the person’s death. 

Estate Income Tax Returns 

An estate will often have income during the estate administration period, such as interest or dividends on savings or investments left by the deceased person or proceeds from the sale of the person’s home. If an estate has any significant income, the executor may be required to file income tax returns for the estate (IRS Form 1041). An estate’s first income tax year begins on the day of the deceased person’s death and can last until as late as the last day of the calendar month before the month in which the first anniversary of the person’s death occurs. (For example, if a person died on May 11, 2023, the first income tax year for that person’s estate can last until April 30, 2024.) 

Estate Tax Returns 

The estate tax (which is not the same as an inheritance tax) is triggered when assets pass from a deceased person to the person’s heirs or beneficiaries. The estate tax generally applies to all assets in or over which the deceased person held significant control, without regard to whether the assets pass by state law, by beneficiary designation, by right of survivorship, or by a Will or other estate planning instrument. In general, while the federal estate tax applies to all estates, it is generally only large estates that will actually have to pay any estate taxes. For most estates, the estate tax exemption (“Basic Exclusion Amount”) will fully offset any estate taxes generated. In fact, if the value of an estate is less than the deceased person’s remaining unused Basic Exclusion Amount (which was $12,920,000 for 2023, which is adjusted for inflation, and which is $13,610,000 for 2024), no estate tax return is generally required. However, it may still be a good idea to file an estate tax return for an estate where there is a surviving spouse, to allow the surviving spouse to take over and use the deceased person’s remaining estate tax exemption.  

If an estate tax return (IRS Form 706) is required, it’s generally due nine months after the date of death. A six-month extension is available if necessary. 

If you have questions about gift taxes, income tax returns for a deceased person, income tax returns for an estate, or estate tax obligations, we’re here to help answer your questions and find someone who can help you file. We recommend addressing estate-related tax matters as far in advance as possible so that tax minimization strategies can be explored. These strategies can be particularly important for those with high net worth and can often be implemented as part of estate planning. With proper planning, the estate planning attorneys at Morgan & DiSalvo have often helped our clients significantly reduce or eliminate the wealth transfer taxes that could be triggered when their assets are transferred to their desired beneficiaries. 

If you’re looking for an Atlanta estate planning attorney who can help with estate tax planning, making gifts, revocable living trusts, and GST trusts, please call us at 678-720-0750 or email us at info@MorganDiSalvo.com to set up an estate planning consultation.

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