Probate and Taxes (Oversimplified)

Taxes are confusing to most folks. We are often asked by executors and heirs, “Do I need to worry about taxes?”

No offense to IRS, but that’s like asking if you need to worry about snakes. The answer is: depends on the snake. For taxes, it depends on whether you are talking about income tax or estate tax.

Estates can owe a federal estate tax, but that is very rare these days. Due to greatly increased exemption limits, only the largest of estates have federal estate taxes owed, and there is no Florida estate tax. The recent tax reform raised the limit to $11,180,000 for individuals and $22,360,000 for married couples.

But estates can owe income tax, either due to taxable income of the decedent before death, or because of taxable income received by the estate after death. The decedent and the estate are separate persons, legally, and they file different returns – a 1040 for the individual and a 1041 fiduciary return for the estate.

Despite all the talk in Washington about simplifying the federal income tax requirements, it has not happened and does not look likely to happen soon. So it’s normal and advisable for estates to hire tax consultants for income tax returns. That can be a CPA, an accountant or a tax service, depending on the complexity of the financial situation. The tax consultant cost is an administrative expense, which under probate law is the first priority of all expenses, along with legal fees and executor fees. That means that even if the estate does not have enough money to pay all the creditor claims in full, it can (and should) pay for any tax consultant needed.

Florida has no income tax on individuals. Therefore, any tax consultant in any state familiar with federal income tax can advise the personal representative. If the decedent used an accountant or CPA during his or her lifetime, it often makes sense for the estate to hire that person for the final income tax returns.