Make Sure You File the Estate Tax Return on Time to Avoid These Penalties

Effective January 1, 2016, the Tennessee Inheritance Tax will be completely abolished and no person dying in Tennessee (unless the legislature enacts laws changing this in the future) will have their estate subject to the Tennessee Inheritance Tax. However, the Federal Estate and Gift Tax is alive and well and estates will continue to be subject to this tax in the future.

Under the Federal Estate and Gift Tax, estates with a gross value above $5.43 million on the date of death (as of 2015 and adjusted annually for inflation) will be subject to the federal estate tax. In addition, the federal estate tax has a top tax rate of 40%. Although, most estates will not be subject to the federal estate tax given the height of the estate tax exemption. However, those estates that are subject to the federal estate tax have deadlines that will need to be followed.

First, for estates that are subject to the federal estate tax, a federal estate tax return must be filed and any tax that is due must be paid no later than nine months after the date of death. In addition, failure to file an estate tax return, or file for an extension, on time will result in the estate being assessed mandatory penalties based upon the amount of the tax was due. However, if the failure to file was intentional, the percentage assessed as a mandatory penalty could be even larger in addition to the tax that was due within nine months of the date of death.

In addition, just because the gross taxable estate is below the $5.43 million exemption, does not mean that an estate tax return does not have to be filed. As we discussed in previous blog articles, there are circumstances in which an estate tax return should be filed. For example, let’s say that John and Jane were married, and when John died, the family assets had a gross value of $1 million. Therefore, John has a $4.43 million estate tax exemption that is going unused. However, when Jane died, the family assets had grown to $11 million. Under portability, by filing an estate tax return and electing portability, John’s $4.43 million unused estate tax exemption is transferred to Jane. Therefore, when Jane died, she could use a $9.86 million estate tax exemption from the estate tax.

Under this example, only $1.14 million of Jane’s estate would be subject to federal estate tax instead of $5.57 million being subject to the federal estate tax. Essentially, by filing the federal estate tax return when John died to make the portability election saved Jane’s family approximately $1,722,000 in tax liability.

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