Are estates exempt from taxation?
Decedent’s estates are not exempt from taxation on income. An estate is treated by the IRS and state taxing authorities as a taxpaying entity separate and apart from the decedent. As of the date of death the decedent’s social security number is no longer used as the reporting number for income earned by the decedent’s assets. The IRS issues a new tax ID number and from then on the estate is a brand new taxpayer. If the estate earns interest on bank accounts or securities in the decedent’s name after death in a particular amount, the income tax is paid using IRS Form 1041, as opposed to Form 1040 for individual living taxpayers. An estate may avoid having to pay taxes from its own accounts by distributing the income earned that year to the beneficiaries entitled to the income. Since the estate passes this income through without retaining it, the beneficiaries who receive it must then include that income in their own income tax returns.
