IRS Form 706: A Comprehensive Guide to Completing the Estate Tax Return for U.S. Citizens and Residents

When it comes to estate taxes, Form 706 is one of the most critical documents in managing estate administration, especially if the estate holds significant value. For those dealing with the estates of U.S. citizens and residents, this IRS form is used to report the estate’s assets and determine estate tax liabilities. Additionally, it’s a crucial step in obtaining Federal Transfer Certificates, which are required for non-citizen beneficiaries to access U.S.-based assets.

Below, we provide step-by-step guidance on how to complete Form 706 and ensure compliance with IRS regulations.

What is IRS Form 706?

Form 706, formally referred to as the United States Estate (and Generation-Skipping Transfer) Tax Return, is submitted by the estate’s executor to report the estate’s assets and determine any estate tax obligations to the IRS.

The form is required if the decedent’s gross estate, combined with adjusted taxable gifts, exceeds the exemption amount for the year of death. The form and tax calculations are governed by specific chapters within the Internal Revenue Code.

Who Must File Form 706?

Tax Form 706 is required for the decedent’s estate of U.S. citizens or residents whose gross estates, plus adjusted taxable gifts and specific exemptions, exceed the federal estate tax exemption amount for the year of death.

Executors or administrators must manage the decedent’s estate, including filing Form 706 ( or Form 706-NA for nonresident aliens) to report estate taxes owed, ensuring compliance with IRS regulations regarding the decedent’s assets and beneficiaries.

• For individuals who pass away in 2024, the exemption amount is $13.61 million.
• In 2025, unless new legislation is enacted, the exemption is expected to revert to approximately $6 million (adjusted for inflation). This reduction means that more estates will likely be subject to estate tax starting in 2025.

Key points to consider:

• Nonresident Aliens: Different rules apply for nonresident aliens, though the estate may still require a Federal Transfer Certificate to transfer U.S.-based assets.
• Marital Deductions: The unlimited marital deduction allows estates to pass to a surviving spouse tax-free, which may reduce or eliminate the taxable estate.

Key Deadlines and Filing Requirements

• Deadline for Filing: Form 706 must be filed within nine months of the decedent’s death, though an automatic six-month extension may be requested using Form 4768.
• Payment of Estate Taxes: Any estate taxes owed must be paid by the nine-month deadline, even if an extension is granted for filing the form.

How to Complete IRS Form 706 (Step-by-Step Guide)

Step 1: Gather Essential Documents

Before starting the form, ensure you have the following documents:

• Decedent’s will and trust documents
• Valuations of the estate’s assets (real estate, stocks, bonds, etc.)
• Proof of debts and liabilities
• Previous gift tax returns, if any
• Accurate appraisals to determine the fair market value of assets

Step 2: Begin with Part 1 – Decedent and Executor Information

Fill in the basic information, including the decedent’s name, Social Security Number, date of death, and the executor’s information.

Step 3: Report the Gross Estate in Part 2

Here, you’ll list all assets, including:

• Schedule A: Real estate
• Schedule B: Stocks and bonds
• Schedule C: Mortgages, notes, and cash
• Schedule D: Life insurance
• Schedule F: Other miscellaneous assets

Step 4: Deduct Tax Liabilities in Part 5

Deductions such as funeral expenses, debts, mortgages, and charitable donations can be listed in this section to accurately calculate the estate’s tax liability.

Properly accounting for these deductions is crucial to ensure the correct tax liability is reported, as inaccuracies can lead to penalties for late filing or underreporting of estates subject to taxes.

Step 5: Apply Credits and Exemptions

Apply the available estate tax exemption for the year of death, along with any marital and charitable deductions. If applicable, calculate the Generation-Skipping Transfer (GST) tax in Part 7.

Step 6: Calculate the Estate Tax in Part 6

Using the information provided, calculate the total estate tax owed by determining the fair market value of assets, factoring in all exemptions, deductions, and credits.

Common Mistakes to Avoid

Handling Form 706 can be a complex process, especially when large estates or multiple beneficiaries are involved. Here are some common mistakes to watch out for:

• Undervaluing or Overvaluing Assets: Ensure that all appraisals and asset valuations are accurate and up to date.
• Missing Deadlines: Not filing on time can lead to penalties and interest.
• Forgetting Foreign Assets: Be sure to include any U.S.-situs assets if seeking a Federal Transfer Certificate for foreign heirs.
• Undervaluing or Overvaluing Assets: Accurate appraisals are crucial. Incorrect valuations can lead to IRS scrutiny or an overpayment of estate taxes.
• Missing Deadlines: Filing Form 706 late can result in significant penalties and interest, making timely submission essential.
• Overlooking Foreign Assets: If the estate includes U.S.-situs assets for foreign beneficiaries, failing to account for these can delay the issuance of a Federal Transfer Certificate.
• Improper Deductions: Failing to correctly apply deductions for debts, funeral expenses, or charitable donations can lead to a higher taxable estate.
• Choosing the Wrong Form: Using the wrong form—such as filing Form 706 instead of Form 706-NA for a nonresident alien’s estate—can result in delays, penalties, or incorrect tax filings. Be sure to confirm the decedent’s residency status and the assets involved before filing.
• Failing to Request an Estate Tax Closing Letter: An estate tax closing letter is crucial for finalizing the estate tax process and providing proof that the IRS has reviewed and accepted the tax return. Failing to request this letter can cause delays in closing the estate and distributing assets.

Completing Form 706 correctly can feel overwhelming, especially given the stakes involved with estate taxes and IRS penalties. Our experienced tax experts at Evolution Tax & Legal can take this burden off your shoulders. From accurate asset valuations to meeting deadlines and ensuring IRS compliance, we’ll handle all aspects of the estate tax filing process, so you don’t have to.

Contact us today to schedule a consultation and learn how we can assist with your estate tax filings and the issuance of Federal Transfer Certificates.

How to Obtain a Federal Transfer Certificate

For non-resident aliens with U.S.-based assets, a Federal Transfer Certificate is needed to release these assets to foreign beneficiaries. Executors of nonresident alien decedents must file Form 706-NA to comply with U.S. tax laws and provide necessary documentation.

After filing Form 706, the executor may request this certificate by submitting an application with the IRS, which includes a copy of the filed Form 706 and proof of estate tax payment, if applicable.

Completing IRS Form 706 is an essential step in administering estates that exceed the federal estate tax exemption. It’s crucial to ensure accuracy and meet all deadlines to avoid penalties. Additionally, obtaining a Federal Transfer Certificate for non-resident beneficiaries requires careful compliance with IRS procedures.

If you’re navigating the complexities of estate tax filings or need assistance with Federal Transfer Certificates, our team at Evolution Tax & Legal is here to help. Contact us to schedule a consultation today.

Frequently Asked Questions (FAQs)

Q: Do I need to file Form 706 if the estate is below the exemption amount?

A: Not necessarily, but filing may still be required to elect portability of the deceased spouse’s unused exemption.

Q: Can I amend Form 706 after filing?

A: Yes, amendments can be filed to correct mistakes or report additional information.

Q: What happens if I miss the filing deadline?

A: Late filings are subject to penalties and interest on any unpaid estate taxes.

Q: What is the difference between IRS Form 706 and Form 706-NA?

A: While both forms deal with estate taxes, they apply to different groups based on the decedent’s residency status:

• Form 706: This form is used for U.S. citizens and residents to report their worldwide estate and calculate estate taxes if the total value exceeds the federal estate tax exemption (e.g., $13.61 million in 2024). It covers all assets, both inside and outside the U.S.
• Form 706-NA: This is for nonresident aliens who have U.S.-based assets. Nonresident aliens only pay estate taxes on U.S.-situs assets, such as real estate or certain U.S. securities. The exemption for nonresident aliens is much lower, typically only $60,000, so estates with U.S. assets over this threshold need to file Form 706-NA.

Q: How do I make payments for estate taxes?

A: Payments for estate taxes related to Form 706 can be made either by check or electronically. For electronic payments, follow IRS guidelines through the Electronic Federal Tax Payment System (EFTPS) or other IRS-authorized electronic payment methods to ensure the payment is processed correctly.