Q: Why would a deceased person’s estate have to file and pay income taxes?
A: An estate may have to file its own income-tax return when assets left behind continue earning income after the person’s death. This is different from an estate tax, which is based on the value of the estate rather than the income it earns.
When someone dies, their tax world splits into two timelines:
Before death (a final Form 1040). Income earned from Jan. 1 through the date of death is generally reported on the deceased person’s final individual income-tax return.
After death (estate income-tax returns). If someone dies June 30, income earned through June 30 is generally reported on the person’s final tax return. If the estate continues earning bank interest, dividends, rental income or investment gains beginning July 1, that income is generally reported by the estate and may need to be reported on Form 1041 and, in Massachusetts, Form 2.
The IRS and Massachusetts each have filing requirements. A federal Form 1041 is generally required if an estate has $600 or more of gross income during its tax year. In Massachusetts, an estate generally must file Form 2 if it has more than $100 of gross income. If income tax is due, it is generally paid from estate assets before the remaining assets are distributed to heirs or beneficiaries.
The bottom line: An estate may have to file and pay income taxes on income earned after a person’s death. Those obligations generally should be addressed before the remaining assets are distributed to heirs or beneficiaries.
Send questions about your taxes to Vincent Hicks, a CPA based in Cambridge who has more than 20 years of experience, at vincent@hickscpasolutions.com. You can call Hicks at (859) 553-0788.
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