Just because someone dies doesn’t mean his tax liability ends. If the decedent’s estate is large enough, the Internal Revenue Service (IRS) will tax it. If you’re named as the personal representative of someone’s estate, you are responsible for filing the federal income tax returns. The IRS’ estate closing letter is formal notice that the estate doesn’t owe federal tax. Until you receive the estate closing letter, the probate court won’t allow you to close the estate.
Estate Tax Deductions
You can use the tax deductions to lower the gross estate’s value below the IRS filing threshold. For 2013, the threshold is $5.12 million. If the decedent has a surviving spouse, you can take the marital deduction. Estate assets that pass directly to the surviving spouse are subtracted from the gross estate. Assets the decedent left to an IRS-qualified charity likewise pass directly to the charity and reduce the gross estate. You can also subtract the costs and fees of administering the estate and any losses incurred during the administration from the gross estate.
Estate Tax Credits
The decedent’s gift tax credit can reduce the gross estate. For example, if the decedent died in 2013, you can deduct the excess gift amount over the gift tax credit from the gross estate. For 2013, the gift tax credit is $14,000 per gift. You need to confirm that the decedent didn’t previously file a gift tax return for the gifts. Otherwise, the estate might pay tax on a gift already taxed. Don’t include the value of any marital gifts; the IRS allows spouses to give an unlimited amount of gifts to each other during their lifetimes.
Filing the Estate Tax Return
If the gross estate is greater than the filing threshold amount after taking the deductions and credits, you must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. After the IRS receives your tax return, it takes about four to six months for the IRS to review it. If the return is selected for audit, it will take considerably longer for you to get your estate closing letter. The IRS has a three-year time limit to audit the return and send the estate a tax bill. Once the tax is paid, you will receive the estate closing letter.
Estate Closing Letter
The IRS sends you the estate closing letter after accepting the estate return. You may have to file the closing letter with the probate court before you can distribute assets to the beneficiaries. You may also have to send a copy to your state’s department of revenue proving that the estate has no federal tax liability. Once this is done, the probate court issues an order closing the estate.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.