4.1.3.1.1.1 Taxation of an Estate Account
Annual income taxes. Any income earned from the estate assets that is not distributed to the beneficiaries, minus any brokerage commissions or fees, will be taxed, and the funds from the estate will be used to pay the taxes. If the income was distributed to the beneficiaries it will be included on the beneficiaries’ individual returns. Taxes will be filed on a Form 1041.
Estate taxes. Estate taxes are due nine months from the date of death. They are filed by the executor on Form 706, and once the taxes have been paid, the IRS will issue an estate closing letter.
To get the total value of the estate, all assets must be valued, including house, other property, investment accounts, insurance policies, annuities, art, furniture, and any assets held in a revocable trust. Then any funeral or administrative costs, debts owed at the time of death, any charitable gifts made at the time of death, and any deduction passed on to a spouse (marital deduction) subtracted off. Taxes will be owed from the estate on any remaining value above $12.06 million (for 2022). The $12.06 million is called the lifetime gift tax exclusion or unified credit, and it often changes from year to year. This number is smaller if a person has made annual gifts above the annual gift tax exclusion in their lifetime. The annual exclusion is currently $16,000.
Marital deduction. If a taxpayer decides to gift any amount to his spouse, that amount will not apply toward the annual gift tax exclusion. This is known as the marital deduction or the unlimited spousal deduction. Note, however, that if the spouse making the gift to the other spouse is not a U.S. citizen, only a small amount can be gifted, with th