Estate Tax vs. Estate Income Tax: What’s the Difference?

The terms estate tax and estate income tax sound remarkably similar, but they refer to two different types of taxes. That distinction can be confusing for families, executors and trustees who are already trying to manage a long list of responsibilities after someone dies. 

An estate may be subject to one, both or neither of these taxes depending on its value, the income it earns and other circumstances. Understanding the difference is a good first step toward determining which tax returns may need to be filed. 

What is an Estate Tax? 

An estate tax is generally a tax on the transfer of a person’s assets at death. It is based on the value of the taxable estate rather than the income those assets generate after the person dies. 

The federal government has an estate tax, although the federal exemption is high enough that many estates are not subject to it. Some states have their own estate taxes as well, and the state thresholds can be considerably lower than the federal threshold. 

That is particularly important for Massachusetts families. 

Does Massachusetts Have an Estate Tax? 

Yes. For deaths occurring in 2023 and thereafter, a Massachusetts estate tax return is generally required when the decedent’s gross estate plus adjusted taxable gifts exceeds $2 million. 

When evaluating whether an estate reaches that threshold, it is important not to look only at assets passing through probate. The gross estate may include real estate, investment and retirement accounts, certain jointly owned property, trust assets, life insurance and other property, depending on the circumstances. 

This can surprise families who assume that because an asset passes directly to a beneficiary, it isn’t part of the estate for tax purposes. Probate and estate taxation are different concepts. 

Massachusetts also does not automatically follow later changes to federal estate tax law. An estate that is well below the federal filing threshold could therefore still have a Massachusetts estate tax filing requirement. 

What Is Estate Income Tax? 

Estate income tax addresses a completely different question: Did the estate earn income after the person died? 

For federal income tax purposes, an estate becomes a separate taxable entity after death. Income the individual earned through the date of death is generally reported on the individual’s final Form 1040. Income subsequently earned by assets held by the estate may instead be reportable by the estate on Form 1041, the U.S. Income Tax Return for Estates and Trusts. 

For example, an estate might continue to receive interest from a savings account, dividends from investments or rental income from real estate. Investments sold during estate administration may also generate gains or losses. 

That income may create a filing requirement even when the estate is nowhere near the threshold for paying estate tax. 

Can an Estate Owe Income Tax Without Owing Estate Tax? 

Absolutely. This is one of the most important distinctions for an executor or personal representative to understand. 

An estate could be too small to have any federal or Massachusetts estate tax liability but still earn enough income after death to require an estate income tax return. For federal purposes, a domestic estate generally must file Form 1041 if it has $600 or more of gross income during the tax year, or in certain other circumstances. 

The reverse can also occur: a larger estate may have an estate tax filing requirement even if the assets generate relatively little income during administration. 

The two taxes measure different things, so they need to be evaluated separately. 

Who Pays Tax on Income Distributed to Beneficiaries? 

This is where estate income taxation can become more complicated. 

Depending on the circumstances, some income may be taxable to the estate, while certain income distributed to beneficiaries may be reported to them on Schedule K-1. Beneficiaries then use the K-1 information when preparing their own individual income tax returns. 

This is one reason the timing and tax implications of distributions should be considered before an estate is closed. Your CPA can work with the estate attorney and other advisors to help determine what tax filings and beneficiary reporting may be required. 

Understanding Which Tax Applies Is the First Step 

You don’t need to memorize estate tax thresholds or understand the mechanics of Form 1041 to serve responsibly as an executor or trustee. You do need to recognize that estate tax and estate income tax are not interchangeable terms and that one estate may have several different tax-filing responsibilities. 

Julie Moran, CPA works with executors, personal representatives, trustees and families in Massachusetts and across the country to identify tax-filing requirements and provide clear, organized support throughout estate and trust administration. 

Have questions about the tax responsibilities of an estate or trust? Schedule a conversation with Julie. https://calendly.com/julie-juliemorantax/30min 

Frequently Asked Questions About Estate Tax and Estate Income Tax 

Are estate tax and estate income tax the same thing?

No. Estate tax generally relates to the transfer of wealth at death, while estate income tax applies to income earned by an estate after death. 

Can an estate owe income tax if no estate tax is due?

Yes. An estate can have an income-tax filing requirement even when its value is below federal and state estate-tax thresholds. 

What tax return reports income earned by an estate?

Estates generally use federal Form 1041 to report applicable income, deductions, gains, losses and distributions to beneficiaries. 

What is the Massachusetts estate tax threshold?

For deaths occurring in 2023 and thereafter, a Massachusetts estate tax return is generally required when the gross estate plus adjusted taxable gifts exceeds $2 million. 

What is a Schedule K-1 from an estate?

A Schedule K-1 reports a beneficiary’s share of certain income, deductions, credits and other tax items from an estate or trust. The beneficiary uses that information when preparing an individual tax return. 

This article provides general educational information and is not intended as individualized tax, accounting or legal advice. Estate, trust and probate requirements vary based on individual circumstances and applicable law. Consult your attorney and tax advisor regarding your specific situation.