According to the most recent data from the IRS, 3,441 tax returns were filed for estates during the 2020 tax season (which applied to decedents that died in 2019). This number was down from 6,409 estate tax returns in the 2019 tax season. If this seems small, you're not wrong. It's because not all estates are required to file a federal estate tax return.
IRS Form 706, officially called the United States Estate (and Generation-Skipping Transfer) Tax Return, is required by the federal government only for estates that meet certain criteria. Learn when Form 706 needs to be filed, who needs to file it, and how to ask for an extension.
When Does Form 706 Need to be Filed?
Form 706 must generally be filed along with any tax due within nine months of the decedent's date of death. However, not every estate needs to file Form 706. It depends on the value of the estate.
The Value of the Estate
For decedents who died in 2021, Form 706 must be filed when their gross estate, plus any taxable gifts given during their lifetime, is valued at more than $11.7 million. This threshold has been indexed for inflation, so it may increase incrementally year over year.
The Tax Cuts and Jobs Act (TCJA) increased the exemption from just $5.49 million in 2017 to $11.18 million in 2018 when the new tax law went into effect. Inflation adjustments bumped it up to $11.4 million in 2019, which rose to $11.58 million for 2020 and $11.7 million for 2021. For decedents who die in 2022, the exemption threshold has been increased to $12.06 million.
The TCJA expires at the end of 2025 unless Congress acts to renew it. If it expires, the federal estate tax exemption will revert back to the 2017 level, although it can be expected to be marginally greater than the $5.49 million figure from that year because of that inflation adjustment.
How to Calculate the Value of the Estate
To determine whether an estate tax return must be filed, add the following values together:
- Adjusted taxable gifts made by the decedent after Dec. 31, 1976, if they exceeded the annual gift tax exclusion in the year they were made
- The total specific exemption allowed under Section 2521 (which was in effect before its repeal by the Tax Reform Act of 1976) for gifts made by the decedent after Sept. 8, 1976
- The value of the decedent’s gross estate valued at the time of death
A gross estate valued at more than the exemption limit must file Form 706 even if no federal estate tax will be owed after applicable deductions and tax credits have been applied.
The Portability Election
The concept of portability of the estate tax exemption between married couples was first introduced in 2011. A surviving spouse can elect to pick up their deceased spouse's unused estate tax exemption under this rule and add it to their own federal estate tax exemption. This is known as the deceased spousal unused exclusion (DSUE).
For example, the Smiths, a married couple have equal ownership of an estate worth $23.4 million. If Mr. Smith died in January 2021, his half of the estate $11.7 million ($23.4 million/2) can be passed on to his wife without any tax liability under unlimited marital deduction. Now if Mrs. Smith dies later, there can be two scenarios –
- Without portability: If Mrs. Smith has not elected for portability and claimed DSUE, then the $11.7 million she inherited from her husband can be passed on to her heirs tax free. But any part of her share of the estate that exceeds $11.7 million would be subject to 40% tax.
- With portability: If Mrs. Smith elects for portability, she can claim the entire unused $11.7 million exclusion. Between this unused exclusion from Mr. Smith and Mrs. Smith's own $11.7 million exemption, she could pass on the entire estate to her heirs virtually tax-free.
A surviving spouse can elect to use their DSUE by filing Form 706 for the estate regardless of whether it is subject to any estate tax. They would make the election on this tax form.
Which States Require Preparation of Form 706?
Sometimes an estate can be taxable at the state level even if it's not taxable at the federal level, and this may require filing Form 706 even if no tax is due to the federal government.
Twelve states and Washington D.C. impose state-level estate taxes of their own as of 2021, and some of their exemptions are far less than what's currently offered by the federal government.
As of 2021, the following jurisdictions require that estates prepare and file IRS Form 706 at the state level, along with all necessary state estate tax forms, even if Form 706 isn't filed with the federal government. The 2021 state-by-state tax exemption limits are as follows:
- Connecticut: $7.1 million
- Hawaii: $5.49 million
- Illinois: $4 million
- Maine: $5.87 million
- Maryland: $5 million
- Massachusetts: $1 million
- Minnesota: $3 million
- New York: $5.93 million
- Oregon: $1 million
- Rhode Island: $1.5 million
- Vermont: $5 million
- Washington: $2.193 million
- Washington D.C.: $4 million
Some states account for adjusted federally taxable gifts in the exclusion amount differently. For example, Vermont's $5 million limit includes adjusted taxable gifts made within two years of death, while New York accounts for adjusted taxable gifts made within three years of death.
When Should a Nontaxable Estate File Form 706?
Some estates that are not required to file federal estate tax returns could consider doing so anyway. It’s typically much easier to settle the estate of a surviving spouse or a non-spouse beneficiary later on if an estate tax return has previously been filed. The starting fair market values and step-up in basis of estate assets will be clearly documented and memorialized on the initial decedent’s IRS Form 706.
How to File an Extension
An automatic six-month extension of time to file is granted to estates that file IRS Form 4768, the Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. Filing Form 4768 automatically gives the executor of an estate or the trustee of a living trust an additional six months to file a tax return.
Form 4768 must be filed on or before the due date for Form 706, or for the equivalent form for a given estate. The estimated tax should be paid by that date as well.
Where to File Form 706 and Form 4768
If filing by mail, you can send Form 706 to the following address: Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999.
If filing by mail, you can send Form 4768 for the extension to the following address: Internal Revenue Service Center, Attn: Estate & Gift, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915.
Frequently Asked Questions (FAQs)
Where to report IRA on Form 706?
According to the IRS, all annuities "including pension plans, individual retirement arrangements(IRAs), purchased commercial annuities, and private annuities," should be reported under Schedule I in Form 706.
Who must file Form 706?
Form 706 is filed by the executor of the estate if the decedent has passed during the tax year and the estate value exceeds a certain threshold. To file Form 706 in 2021, the combination of the gross value of the estate and the value of federally taxable gifts must exceed $11.7 million. For 2022, the threshold is 12.06 million. This Form must be filed within nine months of the decedent's death, or an extension should be filed through Form 4768.