As a tax specialist, I have encountered various forms used for tax purposes. One of the forms that I often come across is Form 706. IRS Form 706, also known as the United States Estate (and Generation-Skipping Transfer) Tax Return, is a tax form used to report the transfer of assets after the death of an individual.
If you’re the executor or administrator of someone’s estate or a beneficiary of an inheritance, it’s important to understand what IRS Form 706 is, how to fill it out, and when to file it. In this article, I’ll provide a comprehensive guide to help you navigate through the process.
What is IRS Form 706?
Form 706 is a tax form used to calculate and report the federal estate tax owed by an estate after the death of an individual. The estate tax is a tax on the transfer of property from the deceased person’s estate to their beneficiaries. It’s important to note that the estate tax only applies to estates with a value above a certain threshold, which changes periodically.
Who needs to file IRS Form 706?
Not everyone who receives an inheritance or is the executor of an estate needs to file Form 706. The form is required to be filed by the executor of the estate if the estate meets one of the following conditions:
- The gross estate of the decedent is valued at $11.7 million or more for deaths occurring in 2021, and $12.06 million for deaths occurring in 2022. This is known as the federal estate tax exemption amount. This amount is adjusted annually for inflation.
- The decedent made certain gifts during their lifetime that exceeded the annual gift tax exclusion amount, which is currently $15,000 per recipient per year.
- The decedent’s surviving spouse wants to take advantage of the deceased spouse’s unused exemption amount, known as the portability election. This is available only if the deceased spouse didn’t use their entire federal estate tax exemption amount.
How to fill out IRS Form 706?
Form 706 is a complex form that requires careful attention to detail. The form consists of 21 pages, including numerous schedules and worksheets. Here is a general overview of how to fill out IRS Form 706:
- Personal Information: Fill out the personal information of the decedent, including their name, social security number, and date of death.
- Estate Valuation: Determine the value of the decedent’s estate by adding up all assets owned at the time of death, including real estate, investments, bank accounts, and personal property.
- Deductions: Subtract the deductions from the total estate value. Deductions can include funeral expenses, outstanding debts, and estate administration expenses.
- Tax Computation: Determine the estate tax owed by calculating the tentative tax, which is based on the net value of the estate, and then apply any credits or exemptions that may apply.
- Schedules: Complete the necessary schedules, including Schedule A – Real Estate, Schedule B – Stocks and Bonds, Schedule C – Mortgages and Notes, and Schedule D – Business Interests.
- Sign and File: Sign and file the completed Form 706 with the IRS.
Here’s a step-by-step guide on how to fill out IRS Form 706:
Step 1: Determine if You Need to File Form 706
Not everyone is required to file Form 706. The filing threshold for the estate tax changes frequently, so it’s important to check the current year’s requirements. As of 2021, you must file Form 706 if the value of the estate exceeds $11.7 million for deaths occurring in 2021. If the estate is valued below this threshold, then you do not need to fill out the form.
Step 2: Gather the Necessary Information
Before you begin filling out Form 706, you will need to gather all the necessary information. This includes the decedent’s personal information such as their name, social security number, and date of death. You will also need to gather information on the assets included in the estate, such as bank accounts, investment accounts, real estate, personal property, and business interests. Additionally, you will need information on any debts or expenses related to the estate.
Step 3: Fill Out the Basic Information
The top section of Form 706 requires basic information about the decedent, such as their name, social security number, and date of death. You will also need to fill out the information about the executor or administrator of the estate.
Step 4: Calculate the Gross Estate
The next section of Form 706 is where you will calculate the gross estate. This includes all assets owned by the decedent at the time of their death, such as real estate, personal property, and investments. You will need to include the fair market value of each asset and total them up.
Step 5: Deduct Any Allowable Deductions
After calculating the gross estate, you will need to deduct any allowable deductions. This may include funeral expenses, debts owed by the decedent, and certain other expenses related to the estate. Be sure to carefully review the instructions for Form 706 to determine which deductions are allowable.
Step 6: Calculate the Taxable Estate
Once you have deducted any allowable deductions from the gross estate, you will arrive at the taxable estate. This is the value of the estate that is subject to estate tax. You will need to apply the appropriate tax rate to the taxable estate to determine the amount of estate tax owed.
Step 7: Fill Out Any Additional Schedules
Depending on the nature of the assets included in the estate, you may need to fill out additional schedules. For example, if the decedent owned any business interests, you will need to fill out Schedule F. If the decedent made any gifts during their lifetime, you may need to fill out Schedule D.
Step 8: Sign and File Form 706
After completing Form 706, the executor or administrator of the estate will need to sign and date the form. The form should then be filed with the IRS within nine months of the decedent’s date of death. If additional time is needed, you may be able to file for an extension.
When to file IRS Form 706?
Form 706 is due nine months after the date of the decedent’s death. An automatic six-month extension can be requested by filing Form 4768, which extends the deadline for filing the estate tax return and paying any estate tax owed.
It’s important to note that even if the estate doesn’t owe any federal estate tax, Form 706 may still need to be filed to preserve the unused portion of the decedent’s federal estate tax exemption amount, which can be used by the surviving spouse or transferred to future generations.
Consequences of not filing IRS Form 706
Failing to file Form 706 when required can result in significant penalties and interest. The penalty for failing to file Form 706 is five percent of the unpaid tax for each month that the return is late, up to a maximum of 25 percent. Interest is also charged on any unpaid tax from the due date of the return until the date of payment.
In addition to penalties and interest, failing to file IRS Form 706 can also lead to the loss of certain tax benefits and deductions that are only available if the return is filed on time.
Final thoughts
IRS Form 706 can be a complex and daunting tax form to complete, but it’s important to ensure that it’s filed correctly and on time to avoid penalties and interest. If you’re the executor of an estate or a beneficiary of an inheritance, it’s crucial to understand whether Form 706 needs to be filed and to seek the guidance of a qualified tax professional to ensure that the form is completed correctly.
While Form 706 may not be something that most individuals encounter regularly, it’s an important tax form that plays a significant role in the transfer of wealth from one generation to the next. By understanding the requirements and process for filing IRS Form 706, individuals can ensure that the transfer of assets is handled in a tax-efficient manner that preserves the maximum amount of wealth for future generations.
Learn more about IRS “Where’s My Refund?”
