District of Columbia Estate Tax

Even if the estate you’re handling isn’t large enough to owe federal estate tax, it might need to file a separate District of Columbia estate tax return. For deaths in 2011, estates with a total value of more than $1 million are subject to the DC estate tax.

Which Estates Must File

If the gross estate of a District of Columbia resident has a value of more than $1 million, the personal representative of the estate must file a DC estate tax return. (Federal estate tax returns are currently required only for estates worth more than $5.12 million, for deaths in 2012.) The estate may not end up owing DC taxes, because deductions may reduce the size of the taxable estate below $1 million.

It’s not just DC residents who may owe District of Columbia estate tax. The estate of a nonresident may also need to file a District of Columbia estate tax return, if the person owned valuable real estate in the district or kept other tangible assets there.

Adding Up the Gross Estate

To determine whether or not a District of Columbia estate tax return is required, add up the value of the deceased person’s gross estate. Be sure to include:

• Real estate
• Bank accounts, certificates of deposit, and investment accounts, including those for which a payable-on-death beneficiary was named
• Vehicles and other personal property kept in the district
• Proceeds from life insurance policies on the deceased person’s life, unless that person didn’t own the policy
• Retirement account funds
• Business interests (sole proprietorship, limited liability company, or small corporation)

If any assets were owned with someone else, count only the value of the deceased person’s interest. If property was owned in joint tenancy with someone else, then include the total value except for funds that the other person contributed—for example, if the deceased person contributed all the money to a joint bank account, then the entire amount would be included in the estate.

Also include these assets:

• Taxable gifts made during life. If the deceased person made taxable gifts (more than the annual exclusion amount, which is currently $13,000 per year per recipient), then add the taxable amount of those gifts to the value of the estate.
• Some transfers made fewer than three years before death. If the deceased person transferred a life insurance policy to an irrevocable life insurance trust within three years of death, you must include the value of the policy in the estate.
• Assets held in a trust. The value of assets the deceased person held in a revocable living trust or other trusts the deceased person controlled is included in the taxable estate.

No ‘Portability’ for DC Couples

Federal law currently allows spouses to share their individual federal estate tax exemptions. If the first spouse to die doesn’t use up all of his or her entire $5 million federal estate tax exemption, then the second spouse’s estate can use the unused portion of the first spouse’s exemption amount. This is called the “portability” provision. It will expire at the end of 2012 unless Congress extends it. Like other federal tax breaks, this one does not apply to legally married same-sex couples.

Spouses cannot share their individual estate tax exemptions for District of Columbia estate tax purposes. All property left to a surviving spouse, however, is exempt from DC estate tax.

Filing the Estate Tax Return

The executor must file the District of Columbia estate tax return (Form D-76 or D-76EZ) and pay any tax due ten months after the date of death. After that date, interest begins accruing on any unpaid amounts, and a penalty applies if you don’t file the return on time. Before the original due date, you can use Form FR-77 to apply for a six-month extension for filing the return, but the extension doesn’t extend the time to pay.

Attach copies of:

• Form FR-77 (request for extension of time to file), if applicable
• your letters of administration
• the will
• if the estate must file a federal estate tax return (IRS Form 706), the entire return
• if you are not required to file a federal estate tax return, pages 1 to 3 of the return
• certified appraisal of property
• the death certificate

To prepare a DC return, you must use schedules from the federal return, even if the estate isn’t large enough to file a federal return. District of Columbia estate tax return forms and instructions are available on the website of the district’s Office of Tax and Revenue.

Help With Preparing Estate Tax Returns

Preparing a federal or District of Columbia estate tax return requires the help of an expert; these returns are quite complicated. Hire a lawyer or CPA who has lots of recent experience with District of Columbia estate tax returns and procedures; the fee, which can be paid from estate assets, will be worth it.