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When does an estate need to file an income tax return?

On Behalf of | Feb 19, 2024 | Estate Administration And Probate |

Tax obligations can have a major impact on estate administration. Larger estates are sometimes at risk of estate taxes, which can substantially reduce the full value of the estate. There could also be income tax obligations to address.

The personal representative overseeing Virginia probate matters could be personally responsible for taxes if they do not handle those obligations properly. They must ensure they file the proper paperwork and use estate resources to handle estate debts before they distribute assets to beneficiaries or heirs.

What income taxes affect an estate?

The testator could potentially owe money to the Internal Revenue Service for income taxes, especially if they worked as a self-employed professional at the time of their death. Frequently, estate administration requires the personal representative of the estate to file an income tax return on behalf of the decedent. A final tax return helps validate whether someone has any outstanding income tax obligations prior to the distribution of their resources. Occasionally, the estate itself could be subject to income tax requirements. The personal representative of the estate may need to file an income tax return on behalf of the estate and may need to use estate resources to cover those taxes.

When is an estate potentially responsible for income taxes?

Income taxes are only an issue for estates after the liquidation of estate resources in most cases. Income taxes are not an issue if a testator left instructions for their personal representative to distribute their property directly to specific beneficiaries. However, people planning their estates often recognize that their loved ones do not necessarily want to inherit their personal property. They may provide instructions requiring the liquidation or sale of some of their assets. For example, if an estate sale generate enough revenue, it might trigger an obligation to file an income tax return.

As of 2024, the threshold for filing an income tax return on behalf of an estate is $600 in revenue. If the proceeds from an estate sale exceed $600, then the personal representative should estimate the tax obligation and retain enough capital to cover those taxes.

Small mistakes during estate administration can potentially lead to major liabilities for the person overseeing probate proceedings. Learning more about tax requirements during probate, and seeking legal guidance as necessary, may help protect those administering the estate of a loved one.