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Earned Income After Death, estate, Estate Income Tax, Estate Income Tax Brackets, Estate Income Tax Rates, Estate Plan
The structure of the estate income tax rates are similar to the individual tax rates. The difference is that the estate income tax brackets are much more compressed than the individual income tax brackets. As a result, the estate will pay a higher tax on lower estate income levels because of the compressed estate income tax rates.
The Impact on Your Estate Plan
The impact that the estate income tax could have on your estate plan could be painful. According to the Putnam Investments 2022 Tax Rates guide, reaching the top rate of 37% takes only $13,450.00 of earned income from the estate. Conversely, a single individual reaches the top rate at $539,000 of earned income. So, if you have an estate that can produce a lot of income after death, the tax burden on your estate could be excessive. As a result, less property will transfer to your beneficiaries.
Finally, consider a possible tax burden in your estate plan. You will need to determine which assets will continue to earn income after death and plan accordingly. At the very least, reducing the estate income tax burden or avoiding the estate income tax should be the focus of your estate plan. This way your intended beneficiaries will receive more of your hard-earned property than the IRS.
References:
Putnam Investments, 2022 tax rates, schedules, and contribution limits.
Was this article helpful? Do you understand how assets earning income after death can cause a high tax burden for the estate? Share your comments of questions in the comment box below.
Help! I opened an inherited IRA then took a total distribution, but it all went into the Estate account. How do I find out how much tax I am going to owe on this and how the heck do I file? I have a Estate EIN number but have no idea how to get started.
Hi Penny,
I am assuming the estate you are handling is going through probate because the IRA proceeds went into the estate account, in which you had to set up for probate. Basically, you will need to hire a tax professional to file a Federal Trust Return 1041 if the proceeds from the IRA exceed $600.00. You may also need to file a state Trust Return or fiduciary return if your state requires.
In terms of how much tax you owe, you personally owe nothing. Since the proceeds went into the estate, the estate will pay any tax on the distribution. That being said, estate tax rates are progressive, but compressed. Therefor, the estate could be assessed a 40% rate for an amount as small as $13,000.00. So, depending on the amount of the distribution, the estate could be paying a steep tax.
In the end, a tax professional may advise you to pass through the distribution to your personal tax return to take advantage of the lower personal tax rates and avoid paying a higher tax. One last thing, the good news is you have 13 months to file the 1041 return if necessary. So, talk to a tax attorney or CPA and they will guide you through the process.
I hope this helps.
Robert
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