Tax Tips: When to Apply for an EIN for an Estate
In Alabama when does an estate need a tax identification number (an EIN) and when is an estate tax return required? There is often confusion about these topics and we hope this explanation helps simplify the decision for you.
Not all estates need an EIN. In fact, for a small estate (even one that must go through probate), often an EIN is not required. If an EIN number is applied for, generally, the IRS will expect an income tax return to be filed.
Examples of When You Need an EIN
An EIN and a tax return will be required if the estate contains income producing property that is earned before the estate assets can be distributed to the beneficiaries and if the gross income is $600 or more. In this situation, it is important to set up a bank account or broker account and have the decedent’s assets transferred into this as soon as possible. This way, the after-death earnings are reported correctly on the estate EIN.
If the estate contains income producing property that is quickly and easily distributed to the beneficiaries so as to have no income earned by the estate (an amount less than $600), an EIN will not be required.
Keep in mind that some assets pass directly to the beneficiaries and those are never put into an estate account. This includes life insurance policies and retirement accounts with named beneficiaries. Real estate that is owned by two people will go directly to the surviving co-owner. If the decedent had a living trust set up prior to death, the earnings are not reported by the estate but by the now irrevocable trust.
If the estate holds no income producing property but a residence that will be sold, the title company will require an EIN to record the proceeds from the sale of the residence. Generally, if the house is sold shortly after the decedents’ death, the fair market value of the house will be the same as the proceeds and so there will be no taxable income to report. In this instance, there is a choice of whether to file an estate tax return or not. The IRS will have a record of the proceeds from the sale and an accounting professional can advise you on best practices if the IRS determines a return should be filed.
Unfortunately, an estate filing determination comes alongside the loss of a family member, so it can be a difficult time. It is always a best practice to have conversations with your loved ones and with your accountant to make the right decisions for your family. Please contact hb&k if you have questions regarding any estate filing questions.
This blog was written by Marian Pekelder, CPA. Marian is a tax manager who has been with hb&k since 2008.