Just as an individual is charged personal income tax, their estate will still be charged for the income they earn during probate. Of course, a living trust is considered as part of a deceased person’s estate. Hence, if the trust assets are generating revenue while probate goes on, the trust will be taxed as well.
So let us look at the various income tax brackets applicable during probate.
Personal Income tax brackets
The income tax return is required if you earned a minimum amount of income in the year you die.
There is a federal personal income tax and your state may also impose a state income tax on your taxable income. The federal income tax brackets are seven, with the lowest being 10% and the highest being 37%. From 0 to $9,875, the federal income tax rate is 10%. From $9,875 to $40,125, it is 12% and so on. The highest rate of 37% is charged for income above $518,401.
Your executor would have to file your final state and federal income tax returns for that specific calendar year, since you could not have done so before passing away. The return is typically due by April 15 of the year after the death. If for instance death occurred in August 2010, then the income tax return form must be filed by April 15, 2011.
If you pass away early into the year before April 15th, then you’ll most likely not have filed your income tax return for the previous year. Hence, your executor would have to file both together.
Income Tax on Estates and Trusts
If your estate and/or trust generate income during probate, then the taxable income will be taxed. The tax brackets are subject to IRS set rates, and your executor may have to file a tax return form known as IRS Form 1041, The Income Tax Return for Estates and Trusts.
The tax brackets, just like every other tax, are adjusted yearly due to inflation.
The executor reports the income distributions on Schedule K-1. He will then send this to the beneficiary and the Internal Revenue Service (IRS). After disbursement of the estate, the beneficiary can then report the asset as income.
However, not all income-generating estate will be charged an income tax. If the asset generating income passes directly to the beneficiary (such as life insurance proceeds, real property held jointly with the spouse), then the income will not be taxed. The executor would also not need to file the IRS Form 1041.
Determining which estate and trust are subject to Form 1041
The estates below will be required to file the estate income tax return form:
- An estate that makes a gross income of at least $600 during probate (that is the tax year)
- An estate having a beneficiary who is a non-resident international.
- Trusts that must file the estate income tax return form:
- A trust with any amount of taxable income
- A trust that makes a gross income of at least $600 aside the taxable income
- A trust having a beneficiary who is a non-resident international.
The executor has to apply for a tax ID number known as an employer identification number (EIN), before he can file the tax return form on the estate’s behalf. He can make the application to the IRS via mail, fax, or online.
Income Tax Brackets for estates and trusts
In 2018, The Tax Cuts and Jobs Act (TCJA) was introduced and it immediately modified the existing income tax brackets. The tax brackets applicable since 2020 are as follows:
- $0 to $2,600 in income: 10% of taxable income
- $2,601 to $9,450 in income: $260 plus 24% of the amount over $2,600
- $9,450 to $12,950 in income: $1,904 plus 35% of the amount over $9,450
- Over $12,950 in income: $3,129 plus 37% of the amount over $12,950
Income tax is not the same as estate tax
It is important to note that income tax is very different from estate tax. Estate tax has to do with tax imposed on the entirety of the estate, based on its value. On the other hand, income tax is charged based on the income the deceased or their estate makes during probate.. While an estate may not be large enough to be subject to state and federal estate tax, it may still be subjected to income tax so long income is earned.
Looking to avoid estate and income tax?
Talk to an estate planning attorney near you