I am frequently asked about the tax that needs to be paid when a loved one dies. For most, the answer is good news. This post is a summary of what to expect. For a definitive answer for your specific situation, give your tax adviser a call.
1. The Estate Tax. The federal estate tax with its rate of 40% is the most feared. Fortunately with the enactment last year of the American Taxpayer Relief Act of 2012 (sometimes referred to as TRA), most of us have little to worry about since it provides a $5 million exclusion which adjusted for inflation is $5.25 this year. For a married couple that exclusion jumps to $10.5 million. So,
a. If you are not close to the $5.25 million for single people and $10.5 million for married couples, "no worries."
b. If you are way over, hopefully you have had many serious discussions with your tax and legal advisers. If not, call today.
c. If you are in the ball park, you should also make the call to your advisers and start informing yourself of your options. if you are married and a spouse dies, IT IS VERY IMPORTANT THAT A ESTATE TAX RETURN IS FILED WITHIN 9 MONTHS OF THAT DEATH.
Since the Colorado Estate Tax is triggered by the Federal Estate Tax, the above summary is all you need, except if you are in a situation where you are computing your potential tax liability, be sure to add in the Colorado tax.
2. Income Tax.
a. A final return is usually required for the deceased person for the year of death. Follow the IRS instructions for a final return.
b. Upon disbursement income tax usually must be paid on retirement accounts owned by the deceased if the deceased did not pay income tax on the money before it was invested.
c. An income tax return may be due from the estate for income earned from the death until the property is distributed and the estate is closed.
3. Property Tax. You will need to pay property taxes on real estate, motor vehicles, etc. for all property owned by the deceased, until that property is transferred to new owners.
Though I have provided several things to think about, none of it is too startling unless you are one of the very few that must pay the Estate Tax. All the other taxes mentioned are the ordinary taxes that the deceased would pay if living and disbursing a retirement account. If you have questions, or find some of this unsettling, call me or your tax adviser for more information.