How Are Taxes Handled In Probate?

For federal and state tax purposes, death triggers two events:

  1. It ends the decedent's last tax year for purposes of filing an income tax return, and
  2. It establishes a new, separate entity for tax purposes, the "estate".
For Federal tax purposes, it may be necessary to complete and file one or more of the following, depending on the decedent's income, the size of the estate, and the income of the estate:
  1. Final Form 1040 Federal Income Tax return.
  2. Form 1041 Federal Fiduciary Income Tax returns for the estate.
  3. Form 709 Federal Gift Tax return(s).
  4. Form 706 Federal Estate Tax return.

For state purposes, an executor must file the appropriate state income tax return plus possible estate tax, inheritance tax and gift tax returns. In many states, gift, estate and inheritance taxes have been eliminated for most small and medium-sized estates. The requirements for filing and payment vary widely from state-to-state.