Filing The T3 Tax Return
What is the T3, and how does an executor file it properly?
Most executors know that completing a final tax return for the deceased is a core duty. But some are surprised to hear they may need to file a return for the estate itselfthe T3 Statement of Trust Income. What is the T3, and how does an executor file it properly?
Filing An Estate Tax Return
What You Need For File An Estate Tax Return
The estate tax is a transfer tax on the value of the decedent’s estate before distribution to any beneficiary.
For estates of decedents dying in 2006 or after, the applicable exclusion amount is $1,000,000. Future changes to the federal estate tax law have no impact on the Massachusetts estate tax.
Estate tax returns and payments are due 9 months after the date of the decedent’s death.
Estate tax returns must be filed by the:
- Personal representative of the estate or
- Any person in actual possession of the decedent’s property.
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What Income Should Be Reported On A T3
- Interest earned on cash held in bank accounts, bonds, GICs, Treasury Bills and similar securities
- Dividends received on stocks, mutual funds or other securities
- Business or farming income generated before shares are distributed to heirs or a farming property is sold
- Capital gains on property that has risen in value between the date of death and the day it is eventually sold or passed to beneficiaries
- Rental income generated by renting the principal residence, cottage or other real estate before distribution or sale
Estate Income Tax Return
You may also have to file a return for the estates income. When a person dies, any income generated by assets that pass through their probate estate exceeding $600 is taxed. The probate estate consists of assets that are held in the decedents sole name without a joint holder or named beneficiary. The estates first income tax year begins immediately after death. The tax year can end on December 31 or the estate can operate on a fiscal year . The estate income tax return must be filed by April 15, 2022 for a December 31, 2021 year end or the 15th day of the fourth month after end of the fiscal year.
If the annual gross income of the estate is below $600, a return does not have to be filed. A tax return is also not required if all the decedents income-producing assets pass directly to the surviving spouse or other designated joint holders or beneficiaries.
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Additional Estate Administration Tax
If the estate owes additional Estate Administration Tax when filing the Estate Information Return, it must be paid at the Superior Court of Justice where the estate certificate was issued.
Submit your payment to the court with:
- an affidavit attesting to the revised values of the estate at the time of death
- the reason for the difference
How Do Canadian Inheritance Tax Laws Work
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Gift And Estate Tax Returns
A fiduciary generally must file an IRS Form 706 only if the fair market value of the decedents gross assets at death plus all taxable gifts made during life exceed the federal lifetime exemption in effect for the year of death$11.7 million for 2021. Even if the fiduciary is not required to file a federal estate tax return, she may opt to do so. For example, a surviving spouse can effectively inherit the deceased spouses unused lifetime exemption amount , which can reduce or eliminate any federal estate tax on the surviving spouses death in order to elect portability, however, the fiduciary must file an estate tax return. The fiduciary, alternatively, may wish to document the step-up in basis in the decedents assets under IRC section 1014. An effective way to do so is to report the fair market value of each asset as of the date of death on IRS Form 706 that valueor, if the return is selected for examination, the value that the IRS and the fiduciary eventually agree uponbecomes the basis of the asset in the hands of the beneficiaries.
The estate tax return is essentially a snapshot of the decedents assets at death, along with a summary of prior taxable gifts. It also reports the decedents liabilities at death, along with a summary of post-death expenses. All of these can be deducted from the value of the taxable estate, thereby reducing any estate tax due.
Do You Need To File A Tax Return For The Estate
The executor must file a federal income tax return if the estate has:
- gross income for the tax year of $600 or more, or
- a beneficiary who is a nonresident alien.
What kind of income does an estate have? Common examples are rents from real estate in the estate, salary that wasn’t paid to the deceased person before death, or interest on an estate bank account.
If you promptly distribute all the estate assets to the people who inherit them, the estate may not have income, and you may not need to file an income tax return for it. For example, if the deceased person owned a house in joint tenancy with his spouse, and had payable-on-death designations on his bank accounts, those assets will pass immediately to their new owners at death. They won’t generate income for the estate.
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Are There Any Inheritance Tax Exemptions
Certain exemptions are available for tax liability incurred for deemed disposition. These include:
- the Principal Residence Exemption
- the Lifetime Capital Gains Exemption.
How do Canadian inheritance tax laws work if the estate is not inherited by a surviving spouse or common-law partner?
- The deceased is considered to have sold all of his or her capital property for Fair Market Value immediately prior to death. This includes, with certain exceptions, all the deceased persons non-registered assets .
- If any of these assets have gone up in value since their acquisition, the estate will owe taxes on the capital gain in the year of death. A capital gain is the difference between the fair market value of the item when purchased and the fair market value item of the same item at the date of death.
- For any registered assets , the deceased person is deemed to have received the fair market value of his or her plan assets immediately prior to death. This amount must be included in the income of the deceased persons tax return.
The Estate Tax Threshold In New York State
The New York State estate tax threshold, however, is $5.93 million for all decedents that die before January 1, 2021. An estate tax return will have to be filed with the New York State Department of Taxation and Finance and estate tax may be due if all assets in the estate are valued at or above $5.93 million. If the estate exceeds 105% of the exemption amount the entire estate is taxed not just the excess.
If the estate is subject to federal and/or New York State estate tax, the return must be filed and the tax must be paid within nine months of the date of death. The estate is granted a six month extension to file, however, an estimated tax payment must be made within nine months. If the return is not timely filed and the tax is not paid with in the nine months, the estate is subject to interest and penalties for the late filing and/or payment.
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Death Of A Taxpayer Part Three
Brian Quinlan / Canadian MoneySaver
This is the third article in a series of four presenting the income tax implications of the death of a taxpayer.
Part 1: The tax implications of deathPart 2: Specific rules that can impact the filing of final personal tax returnsPart 3: Mandatory and optional tax returns for a deceased taxpayerPart 4: Strategies to adopt while alive to minimize the income tax due on death
Form : The Estate’s Income Tax Return
The income tax return form for estates is IRS Form 1041. It’s also called a “fiduciary” return, because you file it in your capacity as executor of the estate. The Form 1041 return is similar to the personal income tax return, Form 1040, that we all file every April 15. There’s a “Decedent’s estate” box at the top the form, which you should check.
The executor of the estate is responsible for filing a Form 1041 for the estate. The return is filed under the name and taxpayer identification number of the estate. On it, you’ll report estate income, gains, and losses, and will claim deductions for the estate. You don’t have to include a copy of the will when you file the return.
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File The Estates Income Tax Return
While the deceased persons Social Security number is their taxpayer identification number for purposes of the income youll report on their 1040, you have to use a different identifier if an estate income tax return is required. Thats because tax law considers a persons estate to be a separate entity from the deceased person for tax purposes. Once all the heirs and beneficiaries of the estate have received their final distribution of the estates assets, the estate ceases to exist and its tax obligations end.
Before filing Form 1041, youll need to obtain a tax ID number, or EIN, for the estate. You can apply for an EIN online, by fax or by mail.
The deceased persons estate is taxed similarly to the way the person was taxed while they were living. Most deductions and tax credits allowed to individuals are also allowed to estates. But the estate is also allowed to claim a deduction for distributions to beneficiaries.
The estates first tax year begins when the decedent dies. You can choose to file a short-year return that ends on December 31 or the end of any other month that ends in an initial tax period of 12 months or less.
Form 1041 is due by the 15th day of the fourth month after the tax year-end if the personal representative chooses a fiscal year for the estates accounting period or by April 15 of the following year if they choose a calendar year accounting period.
Filing Requirements For California Estate Tax Return
A California Estate Tax Return, Form ET-1, is required to be filed with the State Controller’s Office, whenever a federal estate tax return Form-706 is filed with the Internal Revenue Service . However, after January 1, 2005, the IRS no longer allows the state death tax credit therefore, a California Estate Tax Return is not required to be filed for decedents whose date of death is after December 31, 2004.
Pursuant to Revenue and Taxation Code section 13302 the amount of California estate tax is equal to the maximum allowable amount of the credit for state death taxes, allowable under the applicable federal estate tax law. Generally, this amount would be shown on either line 13 or 15 of the Form-706.
The California Estate Tax Return must include a complete copy of the IRS Form 706 and all related schedules. The return should mailed to:
State Controller Sacramento, CA 94250-5880
NOTE: The return should not be mailed to the Franchise Tax Board.
California estate taxes are due and payable by the estate’s executor on or before nine months following the date of death. Checks shall be made payable to the State Treasurer and mailed to the State Controller’s Office at the address listed above.
Pursuant to Revenue and Taxation Code section 13510, the penalty for failure to file a California Estate Tax Return is five percent per month or portion thereof, not to exceed 25%.
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How To File File An Estate Tax Return
Massachusetts estate tax returns may be filed online through MassTaxConnect.
You will need to create an online account to file the estate tax return. Using MassTaxConnect:
- Choose Register a New Taxpayer then
- Choose Register an Estate
Once you’ve created an account, you can log in with MassTaxConnect and file your estate tax return.
Who Is Responsible For Filing The Returns Of A Deceased Person
To be legally authorized to file returns on a deceased persons behalf, you must be their personal representative either the executor or administrator of the estate or anyone in charge of the individuals property. In many cases, this person may be identified in the deceased persons will as executor of the estate. If there isnt a will or the executor named in the will cant or wont fulfill their duties, the court will appoint someone as administrator.
A surviving spouse can file a joint return with the deceased person if a personal representative hasnt been appointed before the due date for filing the return the year of the deceased persons death. But if the surviving spouse remarries before the end of the year in which the taxpayer died, then they cant file jointly with the deceased spouse.
If you are the deceased persons personal representative and make a mistake, either by not filing at all or filing the tax return incorrectly, the IRS may assess penalties, so youll want to take the responsibility seriously.
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How To Calculate The Value Of The Estate
To determine whether an estate tax return must be filed, add the following values together:
A gross estate valued at more than the exemption limit must file Form 706 even if no federal estate tax will be owed after applicable deductions and tax credits have been applied.
When Are The Returns And The Taxes Owed Due
Each type of the deceased return has a due date:
The Final Return:
- If the death occurred between January 1st and October 31st, you have until April 30th of the following year.
- If it was between November 1st and December 31st, it is due six months after the date of death.
The Optional Returns:
- The Return for Rights or Things is due by the later of one year from the date of death or 90 days after the mailing date of the Notice Of Assessment for the final return.
- The other optional Returns such as Return for a Partner or Proprietor and the Return of Income from a Graduated Rate Estate are due on the same date as the final return.
The T3 Trust Return:
The T3 Trust return is due 90 days from the end of the trusts tax year. The T3 tax year starts the day after the death date and the end date can be any date up to one year from the date of death. This means that the due date of the T3 return could be before the final return.
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Work Closely With Your Estate Administration Attorney
Determining which tax returns to file and when they are due can be complicated. It is not advisable to try to figure this out on your own. It is best to work with your estate administration attorney and accountant to make sure that you are timely filing any returns that may due and paying any tax that may be owed.