What taxes must an estate cover during probate proceedings?

The estate of a deceased individual contains the property that they directly owned prior to their death. Assets ranging from bank accounts and real estate to personal property become the property of the estate when someone dies.

Their estate also assumes responsibility for their financial obligations. Typically, the personal representative of an estate needs to cover eligible debts and pay for probate court costs before they distribute funds to the beneficiaries of an estate. In some cases, there may also be taxes due after an individual dies.

What taxes does an estate generally have to cover using the resources of the deceased individual?

It is standard practice for the personal representative of an estate to file a final income tax return on behalf of the person who died. That way, they can use estate resources to cover any outstanding income tax obligations the decedent may have had.

Even those who have retired and may not have needed to file an income tax return prior to their death require a final income tax return. That return helps notify the IRS of their passing and settle any financial obligations they have.

The personal representative may also have to file an income tax return on behalf of the estate. It is common for testators to leave instructions to sell off or liquidate their assets. If the sale of the state resources generates $600 or more, the estate may require an income tax return and tax payments.

Unlike income taxes, estate taxes are not a universal obligation. Probate statutes in Texas do not impose a state estate tax. However, estates that have millions of dollars in property may be responsible for federal estate taxes. As of 2024, the threshold for federal estate taxes is $13.61 million.

Estates worth more than that are subject to federal taxes. The amount by which the estate exceeds the exemption threshold determines the tax rate, which is progressive. The maximum tax rate is 40%. The personal representative typically has a responsibility to cover those tax obligations before they make any distributions to the beneficiaries of an estate.

Understanding the financial obligations that arise during probate proceedings can help personal representatives mitigate the liability that accompanies their role. Taxes can have a significant impact on the final inheritance that people receive from an estate.