Estates/Probate 9

Chapter Nine:
Step Four – Tax Documents

Wills, Trusts, and Probate Law for Paralegals
Gibson
© 2009 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.2
Employer Identification
Number (EIN)
 Serves as the estate’s number for filing
and paying taxes
 Acquired by preparing and submitting
an SS4 form to the federal government

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Decedent’s Final Income Tax
 Personal representative must file tax
return on behalf of decedent & estate
must pay taxes owed
 No matter when decedent died, he lived a
portion of the year – must pay tax on an
income earned during that period
 Form 1040 or 1040EZ

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Gross Income
All income from whatever source derived.
 Salary
 Royalties
 Interest
 Rent Received
 Dividends
 Capital Gains
 Alimony

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Non-taxable income
 Includes:
 Accident and health insurance benefits
 Proceeds from a life insurance policy
 Gifts
 Veteran’s benefits
 Scholarships for tuition

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Taxable Income
The income calculated by subtracting
deductions and exemptions from gross
income or adjusted gross income to
which tax rates are applied to compute
tax liability.
Taxable Income = Gross Income –
(Deductions + Exemptions)

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Deduction
An item allowed to reduce the gross
income amount
 Translates to less tax being owed

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Standard Deduction
A percentage amount set by the IRS,
which the taxpayer may use to reduce
gross income rather than itemized
deductions.
 Taxpayer does not have to justify the
amount

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Itemized Deductions
A taxpayer expense detailed under an
appropriate category to reduce the
amount of taxable income.
 Reported on Schedule A of Form 1040

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Itemized Deductions
 Include:
 Medical bills
 Taxes
 Interest paid
 Charitable gifts
 Losses due to theft or casualty
 Employment expenses
 Miscellaneous expenses

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Exemptions
A reduction in gross income for the taxpayer
and his or her dependents.
2 types of exemptions
1. Personal: for the taxpayer
2. Dependents: living in taxpayer’s household
to which the taxpayer contributes more than
½ of the money used to support the
individual

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Credits
Amounts subtracted from taxable income
to reduce tax liability
 Provide a dollar for dollar reduction in the
tax amount owed
 Examples:

Child and dependent care

Education credit

Earned income credit

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Estate Tax
A one time tax imposed on an estate
because of the decedent’s privilege of
transferring property upon death.
 Responsibility of estate to pay any estate
tax due (IRS Tax Form 706)
 Most estates are not subject to a federal
estate tax.
 Due nine months from the decedent’s date
of death

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Unified Credit
An amount used to reduce tax liability
(credit) that replaces the former lifetime
gift tax exemption and estate tax
exemption.
 Applies to transfers of wealth by inter vivos
gift or testamentary transfer
 AKA – applicable exclusion amount

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IRS Form 706
 Part One – Decedent and Executor
 Basic information re: decedent and
executor
 Part Two – Tax Computation
 Summary of calculations that appear on 20
attached schedules
 Part Three – Elections by Executor
 Selects type of asset valuation

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IRS Form 706 cont.
 Part Four – General Information
 Information re: surviving spouse, amount
inherited and by whom, decedent’s
occupation
 Part Five – Recapitulation
 Totals appearing on each attached
schedule are reported

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IRS Form 706 cont.
When do you complete the deduction
schedules?
 when the value of the total gross
estate exceeds the applicable exclusion
amount

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IRS Form 706 cont.
5 Deduction schedules:
 Schedule J – Funeral Expenses &
Expenses incurred in Administering
Property Subject to Claims
 Schedule K – Debts of the Decedent,
and Mortgages and Liens

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IRS Form 706 cont.
 Schedule L – Net Losses During
Administration & Expenses Incurred in
Administering Property Not subject to
Claims
 Schedule M – Bequests, etc. to
surviving spouse (marital deduction)
 Schedule O – Charitable, Public and
Similar Gifts and Bequests

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IRS Form 706
Marital Deduction  Property passing to
surviving spouse that is not subject to
estate tax

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IRS Form 706 cont.
 Complete deduction schedules
 Subtract deduction amount from gross
taxable estate = net taxable amount
 If net taxable amount is lower than the
applicable exclusion amount – no tax is
due
 If the net taxable amount is higher –
calculate estate tax!

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IRS Form 706 cont.
 Allowed certain tax credits & other reductions
in estate tax owed
 Schedule P – Credit for Foreign Death Taxes
 Schedule Q – Credit for Tax on Prior Transfers
 Schedule R – Generation-Skipping Transfer Tax
 Schedule U – Qualified Conservation Easement
Exclusion

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Inheritance Tax
Tax imposed on the privilege of receiving
a decedent’s property
 No federal inheritance tax
 Imposed by some states
 Opposite of purpose of estate tax

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Fiduciary Tax
 Tax imposed on earnings of an open
estate
 Only required of estates that

produce at least $600 in annual income or

have a beneficiary that is an alien
 Form 1041

Similar to Form 1040

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Fiduciary Tax cont.
Schedule K-1
 A tax document informing an estate’s
beneficiary or heir of the amount of the
estate’s income and deductions allocated
to him or her.

Received only by beneficiaries receiving a
residuary gift

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Closing Certificates
 State that the personal representative
has performed his or her duties with
regard to the tax requirements of filing
and payment
 Filed with the probate court as proof that
the taxes owed have been paid.

Estates/Probate 9

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