My own layman’s guide, born of my own experience and observations – Part 7
In order to discuss the taxes, it’s important to understand the difference between assets and income.
Assets include all property (money, real estate, crab traps, etc.,) transferred into the estate. Every single cotton picking thing that Grampy owned is immediately owned by the estate upon Grampy’s death.
Income is money the asset earns.
Examples
Asset: Savings account Income: Interest
Asset: Gold watch Income: Gain on the sale
Asset: Race horse Income: Winnings at the track
Assets are taxed via inheritance taxes. That’s right: this is a tax on Grampy’s stuff. This is why it is so important to have an official, unbiased, professional appraisal for the big ticket items. (The aforementioned broken down crab traps and the linty neckties? Not so much.) If there is an active investment portfolio, the broker can usually provide you with a date-of-death value. Assets may be taxed at the state level as well as the federal level. This is a one-time tax.
Income is taxed via income taxes. Yes, an estate can earn income, and that income is subject to income tax at both the state and federal level. This includes the usual suspects, interest and dividends, as well as a possible final paycheck. Also, when you liquidate (sell) certain assets, there could be a gain or a loss, and this needs to be reported. Some assets, such as an investment portfolio or an active rental property, can’t help but generate a revenue stream, and this, too, needs to be reported. Yes, it gets very complicated because certain expenses can be taken against certain income.
In order to file estate income tax, you will need to obtain a federal EIN. Your attorney or accountant can help you, or do it for you, or you could navigate the irs.gov website on your own.
Tax Forms and Responsibilities
New Jersey still requires the filing of NJ IT-R for all estates, plus, depending on the date of death and the size of the estate, there is the NJ IT-Estate. NJ’s due date is 8 months after date of death. As explained in Part 1, NJ IT-R calculates tax depending on “who” received the asset, and NJ IT-Estate is simply on the size of the estate, providing the estate is over a particular threshold. For decedents dying between January 1, 2017 and December 31, 2017, inclusive, the threshold is $2,000,000. For decedents dying January 1, 2018 or later, this tax is eliminated.
The IRS requires Form 706 for estates over a particular threshold, which generally changes every year. For decedents dying between January 1, 2017 and December 31, 2017, the threshold is $5,490,000. The due date follows the state due date, which means 8 months after date of death for NJ residents.
Additionally, for each year that the estate is open, and during which the estate earns at least $600 in income from all sources combined, the estate is required to file federal income taxes on Federal Form 1041, and its NJ counterpart of virtually the same name/number. This is due annually, on April 15, adjusted as necessary for weekends and holidays.
Finally, you are expected to prepare an “accounting.” (Yes, that is the formal, legal term in this context.) The “accounting” documents how the assets of the estate were liquidated, spent, and disbursed, as well as what income was earned, and what expenses were paid. It is generally provided to all heirs. Under certain conditions, the accounting must be submitted to the Surrogate’s office…and (you guessed it!) there is a fee. There is also a proscribed format to which you must adhere.
Before you decide to take the DIY route, check out these forms online and make sure you are up to the task. This wee article is only an overview of a topic that can barely fill an entire graduate level class, and can by no means describe or explain all the nuances you will encounter. Sorry. But I just can’t pour decades of experience into a single page. Or even a series of articles.