If you're named as the personal representative of an estate, you are responsible for filing the decedent’s back tax returns in addition to the current income tax return. If the deceased was a resident of one of the nine states that imposes a state inheritance tax, you might have to file that tax return. Some states impose an estate tax in addition to the inheritance taxes. If you're a beneficiary, you must file and pay the state inheritance tax on the distributions you receive.
Federal Income Tax Returns
The amount of the decedent’s federal tax liability reduces the assets that can be distributed to the beneficiaries. The decedent’s final federal income tax return includes all of the income and expenses through his or her date of death. If the decedent didn't file tax returns for previous tax years, she may owe back taxes, interest and penalties. You must file the late returns and pay the total amount due. If an estate was opened, the decedent’s tax returns must be filed and the taxes paid before the estate can distribute the assets to the beneficiaries.
State Estate Taxes
Three states, Maryland, New Jersey and Connecticut, impose an estate tax. If the decedent was a resident of those states, as the personal representative you may have to file a state estate tax return. If the decedent didn't file the required annual state income tax returns, you must file those returns and pay any outstanding taxes, penalties and interest. The state estate taxes must be paid before the estate’s assets can be distributed. To avoid double taxation, the amount of the state estate taxes that were paid can be deducted on the federal estate tax return.
State Inheritance Taxes
After the decedent’s personal taxes and the federal and state estate taxes are paid, the beneficiaries can receive their inheritance. Nine states, Connecticut, Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee, impose a state inheritance tax. As a beneficiary, you will have to pay an inheritance tax on the estate assets you receive. You can deduct the inheritance tax amount you paid on your federal personal income tax return.
How to File
You can find information about state inheritance taxes on the state’s website. You can download the inheritance tax forms along with instructions on how to complete the forms. Each state taxes an inheritance differently. For example, Indiana has a maximum 20 percent inheritance tax rate, while Tennessee has a 9.5 percent tax rate. The state’s website has the most recent inheritance tax information posted there.
- Stockbyte/Stockbyte/Getty Images
- IRS Estate Closing Letter
- What Happens When You Die & Owe Taxes?
- Can Life Insurance Pay for Inheritance Taxes?
- How to Know If I Need to File State Taxes
- Inheritance Tax in Maryland for Heirs Who Are Not Children
- Can Unmarried Couples Avoid Inheritance Tax on Joint Assets?
- The IRS Requirements for IRAs With No Beneficiaries
- The Responsibility for Paying an Inheritance Tax