Tax Considerations After the Loss of a Loved One (2023)

If you lost a loved one in 2023, there are several important tax filings and estate rules to be aware of. Here’s a breakdown to help you navigate the process:

Estate Value and Estate Tax

The total fair market value (FMV) of all assets owned by the deceased must be calculated as of the date of death, before any deductions are applied.

  • If the estate’s total value is under $12.92 million, no federal estate tax is due, and no Form 706 (Estate Tax Return) is required.
    • In this case, beneficiaries receive their inheritance tax-free, and assets receive a step-up in cost basis to the FMV on the date of death.
  • If the estate’s value exceeds $12.92 million, Form 706 may need to be filed to determine whether any estate tax is owed.
  • This return is typically due nine months after the date of death.

Key Tax Forms to Know

Form 1040 – Final Individual Income Tax Return

  • Filed for any income earned before death.
  • Due April 15th of the year following death.
  • This return must be filed even if no tax is due, to protect the executor from liability.

Form 706 – Estate Tax Return

  • Required only if the estate exceeds the $12.92 million exemption.
  • Also used to make the portability election, which allows a surviving spouse to inherit any unused portion of the deceased spouse’s estate tax exemption.
  • Must be filed within 9 months of death (or up to 5 years later if filing only for portability).
  • Note: Even if no estate tax is due, it may be beneficial for married couples to file Form 706 to preserve the unused exemption.

Form 1041 – Estate Income Tax Return

  • Reports any income the estate earns after death, such as interest, dividends, or rent.
  • Required annually until the estate is fully administered and closed.
  • The executor chooses the fiscal year, and the return is due based on that selection.

Note: Filing is recommended even for small amounts, especially if assets are distributed to heirs, as deductions may apply.