In situations involving the death of a taxpayer there often are questions about filing income tax returns. When a person dies, they may still be required to file a final 1040. The main exception to this requirement is when their income, up to their date of death, is below the filing requirements. For 2006, this filing requirement is, more than $8450 of taxable income. If they are required to file, they can only report income up to their date of death. Income earned after that, generally is reported by their beneficiaries. This makes sense, as they will end up owning the assets that generate the income.
Income earned, post date of death, may flow through a 1041 estate. I think of an estate being created upon all deaths. The estate holds the assets until they are distributed to the beneficiaries. If there is more than $600 of income earned during a year by an estate, a form 1041 is required to be filed. Less than $600, and no 1041 is required. An estate is usually a pass through entity. It’s income and losses are passed to the beneficiaries. The beneficiaries receive a K-1 from the estate reporting their share. Some estates elect to pay the tax on their income, but this is not advised, as 1041 estate tax rates are unusually high. Passing through the income is generally preferred.
So the general idea is to get the assets out of the estate and to the beneficiaries as soon as possible. Though I am not a lawyer, it is my opinion that not all assets owned by the deceased end up in the estate. Some are owned so as to pass, instantly upon death, to the beneficiary(s). If the case is that one spouse dies, and leaves everything, cleanly and without complications to the other spouse, we are generally not looking at doing a 1041 estate tax return. An estate covers assets in limbo, those not yet finally and completely owned by the beneficiaries. I have not addressed the other estate tax, where ones total assets, if over $2,000,000, are taxed here.
I recommend you consult a CPA specializing in taxes if you end up having to take care of an estate.
