@seattlecyclone So if the estate pays the taxes then does that mean the money due to heirs at the close of the estate passes free and clear with no further reporting needed on individual tax returns?
For tax-related projections, could I model the estate like a single person? Is that how that would be viewed?
The following relates to *income* that your grandfather or his estate receive, whether that's capital gains, dividends, interest, business income, W-2 income, etc:
Everything that happened up to your grandfather's date of death is reported on his final income tax returns - federal and state if applicable. The executor should be able to sign or e-file these returns, and they're due on the normal schedule. If there are any refunds, I think there's an extra form to fill out to claim it on the federal level. The refund would become a part of your grandfather's estate and be distributed according to the terms of his will (or state intestacy laws if he died intestate).
Anything that happens after distribution of assets to the beneficiaries is income and taxed on the beneficiaries' income tax returns.
Anything happening after his death and before distribution of assets (including things such as the sale of the house, if that's the way things end up happening) would be reported on his estate income tax return on Form 1041, which would be filed in the name of his estate and with the estate's EIN.
Form 1041s are due on the same schedule as Form 1040 if the estate uses calendar year reporting. Otherwise, I'd point you to the "When to File" section of instructions for Form 1041 (page 8 on the 2020 instructions) if you want to explore a short or non-calendar-year tax year.
Form 1041s are sort of like a 1040 but differ in a lot of ways. Two key differences are that the standard deduction for an estate is only $600 instead of the ~$12K - ~$15K standard deduction for a single person, and the trust tax rates and brackets are much more aggressive - see the Form 1041 instructions for the brackets...they're buried in the instructions for Schedule G line 1a.
If the house is sold as you described, the sale of the house would be reported on the Form 1041 Schedule D (which looks very similar to a regular Form 1040 Schedule D) and flow to Form 1041 line 4. The estate may be able to, and may want to, distribute any capital gain or loss to the beneficiaries of the estate. This would be done on Form 1041 Schedule B via the Income Distribution Deduction and via Form 1041 K-1s. There will be one K-1 for each beneficiary. This would have the effect of having the proportional capital gain or loss be reported on the beneficiaries' tax returns instead of the estate income tax return.
What seattlecyclone says above and what you suspect is accurate though - any capital gain or loss is either done on the estate tax return or the beneficiaries' tax returns, not both.
Any dividends, interest, or other income that your grandfather's estate might receive would also be reported on the estate's form 1041. There are deductions on the estate tax return for legal and tax preparation fees associated with the estate.
If your grandfather's estate has less than $600 in taxable income *and* you don't want to distribute estate income to the beneficiaries, then I think you are not required to file an estate income tax return.
If his estate files a federal estate income tax return, his executor might also need to file a state estate income tax return. In my state this is Form 66.
The following relates to the *assets* of your grandfather and his estate:
If your grandfather's taxable estate was over $11.7M or over his state's applicable estate tax limit, then the executor would typically also need to file an estate tax return for either federal or state or both, as applicable. The federal estate tax return is Form 706. My state doesn't have a state estate or inheritance tax. Form 706s are due, when applicable, 9 months after his date of death.
Some states impose inheritance taxes on the recipients. If your mom is a beneficiary, for example, she should check her state's inheritance tax laws and see if she needs to pay this tax. These are not common.
After any income taxes are paid by him on his final form 1040 and state income tax return, and after any estate income taxes are paid by his estate, and after any estate taxes are paid by his estate, and other than any inheritance taxes the beneficiaries might have to pay, then the transfer of assets is not taxed.
HTH.
