Many estate executors focus on estate taxes and forget about income taxes. That can be an expensive mistake.
An estate is subject to income taxes much like an individual is. The estate must file an annual income tax return for every calendar year it is open for at least part of the year. This is separate from the estate tax return. The estate tax return is based on the value of the property in the estate. The estate income tax return reports the income received and deductible expenses paid during the calendar year. Only one estate tax return is due, but an estate income tax return is due for each year the estate was open.
Many executors distribute income to estate beneficiaries as it is received by the estate. This ensures the estate doesn’t owe taxes on the income. The estate takes a deduction for income distributed to the beneficiaries in the same year it is received by the estate, and the beneficiaries include the distributions in their gross income.
But if the estate doesn’t distribute income before the end of the year, the estate is taxable on it.
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