CPAs and Tax Professionals: Partnering on Estate Tax Compliance in NC

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Settling an estate in NC? Afterpath guides you through probate step by step — $199 vs $10,000+ attorney fees.

North Carolina eliminated state income tax on estates and fiduciaries effective January 1, 2024. This seismic shift in state tax law creates new planning opportunities and compliance requirements that CPAs must navigate. But the real challenge for tax professionals isn’t the law change; it’s the data quality problem. Most executors arrive with incomplete, disorganized financial records, scattered expense documentation, and missing cost basis information. You spend 15-30 hours per estate requesting documents, reconciling discrepancies, and researching missing information. Afterpath solves this upstream by organizing executor data systematically, so you can focus on tax strategy instead of detective work.

Afterpath’s data collection system guides executors through systematic asset discovery, expense tracking, and documentation of fair market values at death. CPAs export organized data directly into tax software, eliminating manual reconciliation and reducing time spent on data gathering by 25-40%. This improves your margin on flat-fee engagements, enables higher-value advisory work, and improves client relationships through clearer communication.

NC Estate Tax Landscape in 2024: The Seismic Shift

The Historic Elimination of NC State Income Tax on Estates

Until January 1, 2024, North Carolina imposed income tax on estates and fiduciary entities at the top state income tax rate of 4.99%, the highest among estate-taxing states. This created a significant tax burden on estates, particularly those that fell below the federal estate tax exemption but still had earned income during the administration period.

The Tax Cuts and Jobs Act of 2017 increased the federal estate tax exemption to $12.92 million per individual (rising to $13.61 million in 2024), which means most North Carolina estates drop well below the federal exemption threshold. Yet under the old law, these same estates were still trapped paying North Carolina income tax on fiduciary income, creating a mismatch between federal and state treatment.

North Carolina Statute General Statute 105-1.1A, effective January 1, 2024, eliminated this state income tax burden retroactively. All 2024 fiduciary income and estate returns filed are exempt from state income tax. This represents a fundamental change in how you structure fiduciary tax compliance for NC estates.

Implications for Tax Planning and Compliance

The elimination of NC state income tax does not eliminate the need for fiduciary income tax returns. However, it shifts the focus entirely to federal planning and eliminates a layer of state-level complexity.

Before 2024, CPAs filing for NC estates would prepare both the federal Form 1041 (U.S. Income Tax Return for Estates and Trusts) and the NC Schedule F-2 (state fiduciary income tax return). After 2024, the Schedule F-2 is gone. Now you prepare the federal Form 1041 only, which simplifies the filing process and eliminates state income tax liability.

This creates an opportunity. With state income taxes no longer a consideration, CPAs can focus federal tax planning on optimizing between the final Form 1040 (the deceased’s last individual return) and the Form 1041 (the estate’s fiduciary return). The compression of federal fiduciary income brackets means strategic decisions about income distribution to beneficiaries become even more important for federal tax savings.

Federal Estate Tax and the Stepped-Up Basis Opportunity

While state income tax is gone, federal estate tax requirements remain. The federal estate tax exemption sits at $13.61 million per individual in 2024 (and $27.22 million for married couples), but this exemption is scheduled to drop to approximately $7 million per individual in 2026 unless Congress extends it. This creates urgent planning windows for high-net-worth estates.

The true planning opportunity lies in stepped-up basis. Under IRC Section 1014, assets in estates receive a “stepped-up” basis to fair market value at the date of death. This means heirs pay zero capital gains tax on appreciation that accumulated before the decedent’s death, no matter how significant. A property purchased for $50,000 that appreciated to $500,000 by the date of death gets a stepped-up basis to $500,000, allowing the heir to sell it immediately with zero capital gains tax.

Stepped-up basis planning requires meticulous documentation. You need fair market value documentation at death for every estate asset, cost basis information for each asset, and evidence of the basis step-up for IRS audit defense. Afterpath collects this information systematically during the asset discovery phase, enabling you to support stepped-up basis planning decisions with proper documentation from day one.

The CPA’s Data Integrity Problem

Why Executors Arrive With Incomplete Information

The reality of estate administration is stark: most executors are first-time, non-accountant families inheriting a parent’s financial life without an organization system. They face immediate stress (funeral planning, family notifications, creditor management) before they even think about gathering financial records.

Common problems you encounter repeatedly:

Missing cost basis documentation. Executors don’t know what their parent paid for investments. They find a brokerage statement showing current value but no historical cost basis. Your firm spends hours requesting this from institutions or reconstructing it from partial records.
Incomplete expense records. Funeral expenses, court costs, attorney fees, and estate maintenance costs are scattered across sources. Executors track some expenses in a spreadsheet, others are still in the deceased’s checkbook, some exist only as emails to contractors. You reconcile these manually.
Missing fair market value documentation at death. For stepped-up basis calculations, you need FMV on the date of death for every asset. Most executors provide only whatever statement was in the deceased’s file on that date, missing recent valuations or failing to understand what “fair market value” means.
Dual record-keeping. Some assets are tracked in the will, others aren’t. Some are in the probate estate, others in non-probate beneficiary accounts. Executors haven’t unified these into a single inventory, so you reconstruct it from multiple sources.
IRS audit risk. Incomplete documentation creates audit exposure. If the IRS questions basis step-ups, valuation choices, or deduction categorization, you lack supporting evidence. Executors end up bearing the risk.

The Downstream Impact on Your Firm

This data quality problem directly impacts your economics and relationship with executor clients.

On a typical flat-fee engagement ($1,500-3,000), the data gathering and reconciliation phase consumes 20-25 hours of your time. That’s 60-75% of your engagement hours spent on non-value-added data collection. If the engagement is flat-fee, that margin disappears. If it’s hourly, the client sees unexpected cost overruns and becomes frustrated.

Executors become frustrated too. They don’t understand why you’re asking for information they think they’ve already provided. They feel judged for disorganization. The relationship becomes adversarial instead of advisory.

You also lose the opportunity to provide planning work. Time spent gathering data is time you’re not spending on optimizing between Form 1040 and Form 1041, or strategizing about income deferral and deduction timing. The advisory work that generates higher margins never happens.

How Afterpath Solves the Data Quality Problem Upstream

Afterpath’s data collection system is built specifically to gather the information CPAs need, in a format that facilitates your work.

The platform guides executors through systematic asset discovery. Each asset is documented with standard information: description, account number, institution name, date of death fair market value, cost basis (if available), and executor’s custodial status. As the executor discovers assets over time (uncovering old investment accounts, finding life insurance policies, discovering retirement accounts), they log each in the system.

Expense tracking works similarly. As the executor pays bills, they log each transaction: amount, date, category (funeral, court costs, legal fees, maintenance, utilities), and upload supporting receipts. The system automatically categorizes expenses and creates a running ledger that maps directly to tax deduction categories.

The final accounting feature generates a draft balance sheet and expense summary showing all assets, all expenses, and all distributions. You export this data and import it directly into your tax software, eliminating manual reconciliation of multiple spreadsheets.

The audit trail benefit is substantial. Every transaction is logged with a date, amount, category, and document reference. This creates the documentation trail the IRS expects for audits, without requiring you to reconstruct it from scattered paper and emails.

Federal Estate Tax Filing and Form 706

When Form 706 is Required and Why Timing Matters

Form 706, the federal estate tax return, is required when an estate’s gross assets exceed the federal exemption at the time of death. With the 2024 exemption at $13.61 million, most NC estates don’t trigger the requirement. However, higher-net-worth estates need this filing even if no tax is owed.

The reason is the portability election. If the deceased was married, filing Form 706 allows the surviving spouse to elect portability, which preserves the deceased’s unused exemption for the survivor’s later estate. Without a timely Form 706 filing, that exemption is lost forever, potentially costing the family millions in federal estate taxes.

The deadline for Form 706 is nine months after death (with a possible six-month extension). This creates urgency during the probate period. You need asset fair market value documentation within that nine-month window, which means executors must understand valuation requirements early.

NC’s probate timeline (typically six to eighteen months) overlaps with the federal estate tax deadline. Afterpath’s task management system flags the Form 706 deadline early and coordinates asset documentation requirements across both processes.

Fiduciary Income Tax Return (Form 1041) and Post-2024 Compliance

Form 1041 Filing Requirements

Form 1041, the fiduciary income tax return, is required when an estate earns taxable income during the administration period. Taxable income includes interest on bank accounts, dividends from investments, rental income from real property, capital gains from asset sales, and business income if the deceased operated a business that continues.

The key threshold is whether the estate earned more than $600 in gross income. Most estates with meaningful financial accounts will surpass this threshold within the first tax year, requiring a Form 1041 filing.

The estate’s tax year is flexible. Unlike individuals who must use a calendar year, estates can choose a fiscal year beginning the day after death and ending on the last day of any month within twelve months. This fiscal year flexibility is valuable: you can align the estate’s tax year with expected settlement dates, potentially avoiding a second fiduciary return if the estate closes before year-end.

NC Compliance Changes Post-2024

Pre-2024, your NC compliance checklist included filing both Form 1041 (federal) and Schedule F-2 (NC state fiduciary income tax). Effective 2024, the Schedule F-2 is eliminated. You still file the federal Form 1041, but there’s no corresponding NC filing for estate fiduciary income.

This simplification is welcome, but it creates one complication: beneficiaries still owe NC income tax on K-1 distributions they receive. When you issue Schedule K-1s to beneficiaries showing their share of estate income, those beneficiaries must report the K-1 income on their own NC returns. You don’t file for the estate at the state level, but beneficiaries have individual state reporting obligations.

This matters for CPA-executor communication. You must explain to executors that eliminating the estate’s state income tax doesn’t eliminate all state tax obligations; it shifts them to beneficiaries. This affects distribution planning, as beneficiaries in low-income tax situations may preferentially receive K-1 income over other distributions.

Final 1040 vs. Form 1041: Strategic Deduction Planning

The Dual-Return Opportunity

In the year of death, you file two income tax returns for the decedent: the final Form 1040 (the deceased’s last individual return covering January 1 through date of death) and, if the estate earns income during administration, the Form 1041 (the estate’s fiduciary return).

This creates a planning opportunity. Certain deductions and expenses can be claimed on either return, and CPAs strategically allocate them to minimize total tax burden. With NC state income tax on estates now eliminated, this planning becomes a federal-only optimization, which simplifies the analysis.

Medical and Funeral Expense Deduction Strategy

Medical expenses incurred before death (hospital bills, doctor visits, medications) are deductible on the final Form 1040 under the medical expense deduction (subject to the 7.5% AGI threshold). Medical expenses paid from the estate after death can be deducted on Form 1041 with no AGI threshold.

This distinction matters. If the final Form 1040 has limited AGI, the 7.5% threshold may eliminate most medical deductions. Form 1041, by contrast, allows a medical deduction with no threshold. Strategic allocation saves tax dollars.

Funeral and burial expenses are deductible on Form 1041 (the estate return) as administration expenses, not on Form 1040. This distinction is critical: executor and family must separate “medical costs of the decedent before death” (potentially Form 1040) from “funeral and burial costs incurred after death” (Form 1041).

Afterpath’s expense tracking system separates medical expenses by date paid: before-death medical goes one category, post-death funeral and administration goes another. This enables you to allocate deductions correctly without manual record reconstruction.

Administr ative Deductions and Their Impact

The estate receives a deduction for legitimate administration expenses: court filing fees, attorney fees for probate proceedings, executor fees, accounting fees, and appraisal costs. These are deductible on Form 1041 (Schedule J, line 5), but only if the estate is substantial enough to benefit from the deduction.

With NC state income tax eliminated, this deduction is federal-only, reducing its value compared to pre-2024. However, for estates with significant federal income, the deduction still matters. Afterpath tracks administration costs in a dedicated category, enabling you to document and categorize these consistently across estates.

Building Strong CPA-Executor Relationships

Closing the Communication Gap

The communication gap between CPAs and executors is substantial and avoidable. CPAs expect executors to understand tax concepts (basis, fair market value, fiduciary accounting income); executors expect CPAs to explain why they need information in understandable language. When neither happens, frustration emerges.

Afterpath bridges this gap through standardized data collection. Instead of CPAs sending vague requests for “cost basis documentation,” the Afterpath system asks executors specific questions: “What did you pay for this investment?” “When did you buy it?” “Do you have the original statement?” The standardized interface removes ambiguity.

Executors also benefit from clarity about process and timeline. Afterpath generates a probate timeline showing when different documents are needed and when each task is due. Executors understand the CPA’s needs in the context of the larger estate settlement process.

Positioning Afterpath as a Partnership Tool

CPAs partner with Afterpath by recommending the platform to executor clients at the initial engagement meeting. The framing is crucial: you’re not outsourcing the financial work; you’re organizing the executor’s data so the financial work goes faster and better.

CPAs communicate: “Afterpath is a tool you’ll work with to organize your assets and expenses. I’ll integrate the data you compile into our tax software. By following Afterpath’s checklist, you’re giving me exactly what I need, and our process is faster and smoother.”

This positioning demonstrates that you invest in the executor’s success. You’re not trying to lock executors into your own system; you’re recommending an external tool that serves their needs. Executors appreciate the recommendation and feel supported.

Many CPAs establish referral partnerships with Afterpath, either for direct referral fees or mutual referral agreements where Afterpath recommends CPAs to executor clients who need tax work. These partnerships create additional revenue streams and market differentiation for your firm.

Setting Clear Expectations Around Timeline and Cost

Executor clients often arrive with unrealistic timeline expectations. They think “probate is six months, so my taxes will be done in six months.” CPAs know that estate tax work cannot complete until probate is substantially finished (minimum 6-12 months in most cases). Early clarity prevents disappointment.

Afterpath helps manage expectations by showing executors the full settlement timeline. The platform displays when probate court deadlines occur, when assets will be valued, when distributions are expected. CPAs reference this timeline when explaining why tax work takes as long as it does.

Cost clarity also matters. CPAs should explain upfront whether Afterpath’s cost is absorbed into the CPA fee or passed to the executor as a separate charge. Transparent communication prevents surprise costs and preserves relationships.

Billing model choice also matters. Flat-fee engagements work well for simple estates with organized data (Afterpath helps create this). Hourly billing works for complex estates where you can’t predict data quality upfront. Value-based billing works when you’re providing planning services beyond basic compliance. Each model has merit depending on estate complexity.

Stepped-Up Basis: The Core Planning Opportunity

How Stepped-Up Basis Works in Practice

Stepped-up basis is the most powerful planning opportunity available in estate taxation. Under IRC Section 1014, assets owned by the decedent at death receive a basis adjustment to their fair market value on the date of death.

Example: The decedent purchased Apple stock for $10,000 in 1990. The stock appreciated to $500,000 by the date of death in 2024. If the stock is inherited, the heir receives a basis of $500,000 (stepped-up from the original $10,000). If the heir sells the stock immediately for $500,000, there is zero capital gains tax. The entire $490,000 appreciation is tax-free to the heir.

This is extraordinary value. If the heir inherited the stock while the decedent was alive, the heir would inherit the $10,000 basis and owe capital gains tax on the $490,000 appreciation if sold. By inheriting at death, the heir eliminates the capital gains tax entirely.

Stepped-up basis applies to all estate assets: real property, investments, business interests, personal property. The benefit is universal across asset types. For high-net-worth estates with significant appreciated assets, stepped-up basis can be worth millions of dollars.

Documentation Requirements for Audit Defense

The IRS does not automatically accept stepped-up basis claims. The executor must establish fair market value on the date of death with credible evidence. This means appraisals, independent valuations, or documented market transactions.

For publicly traded securities, fair market value is straightforward: the average closing price on the date of death. For real property, a professional appraisal is required. For closely held business interests, a business valuation expert must establish value. For less liquid assets, comparable sales or market analysis provides evidence.

Documentation is critical because the IRS frequently challenges basis step-ups in audits. If you claim a $500,000 fair market value for a real property but have no appraisal, the IRS will question the valuation and propose a lower FMV, increasing the heir’s capital gains tax if the property is later sold.

Afterpath collects FMV documentation at the asset discovery phase. Executors provide copies of appraisals, market research, and expert valuations. This creates the documentation trail you need for IRS defense without scrambling to reconstruct valuations years after death.

Planning Decisions That Affect Basis Step-Up

One underappreciated planning opportunity: executors should hold appreciated assets in the estate during the settlement period rather than sell them quickly. The longer assets are held, the greater the time value of the stepped-up basis opportunity.

Example: An estate owns a rental property purchased for $200,000 that’s now worth $400,000. If the executor sells it immediately, the estate recognizes a $200,000 capital gain. If the executor waits twelve months and sells it, the estate still recognizes the same $200,000 gain (timing doesn’t change). However, if the estate distributes the property to the heir at stepped-up basis and the heir sells it, the heir gets zero capital gain and zero capital gains tax.

This is where strategic advice creates value. You can recommend to executors that they hold appreciated assets through settlement rather than liquidating for cash distributions. Distributing stepped-up-basis property to heirs is superior tax planning for appreciat ed assets.

CPA Checklist: NC Estate Tax Compliance for 2024

To ensure compliance and avoid gaps, use this checklist for every NC estate engagement:

Engagement Startup

Obtain estate identification number (EIN) from executor; confirm if not yet obtained
Determine probate status (informal, formal, or simplified administration)
Establish executor’s fiscal year choice for estate income tax return (calendar year, or fiscal year ending on specific month)
Confirm probate timeline and expected settlement date
Identify all assets and institutions (real property, bank accounts, investments, retirement accounts, life insurance, business interests)
Collect date-of-death fair market values for all assets (appraisals, statements, valuations)
Identify cost basis information for investments and appreciated assets
Explain NC income tax elimination (NCGS 105-1.1A) and its impact on filing requirements

Federal Form 1040 (Deceased’s Final Return)

Gather income through date of death (W-2s, 1099-INT, 1099-DIV, K-1 distributions, rental income, business income)
Collect medical expense documentation (date paid is critical; before-death medical, not post-death)
Confirm charitable contributions (qualifying deductions only)
Document home office, depreciation, or other itemized deductions
Determine filing status (usually “married filing joint” or “single”; not “head of household” unless special circumstances)
Calculate and claim medical expense deduction strategically

Federal Form 1041 (Estate Fiduciary Income Tax Return)

Confirm whether estate earned taxable income during administration period
If income earned, select tax year and filing deadline
Gather income documentation for estate (interest, dividends, rental income, capital gains, business income)
Calculate distribution deduction (income allocated to beneficiaries via K-1)
Prepare Schedule K-1s for each beneficiary showing their share of income
Calculate estate’s taxable income and liability
Track estimated tax payments (if estate expected to owe $1,000+ annually)

NC Compliance Post-2024

Confirm that no Schedule F-2 (state fiduciary income) filing is required (eliminated effective 2024)
Ensure beneficiaries understand they must file NC returns on K-1 distributions (state tax still applies to beneficiary recipients)
Review whether any deduction shifting between Form 1040 and Form 1041 improves total tax position

Form 706 (Federal Estate Tax Return) if Applicable

Confirm estate gross assets and whether exemption exceeded ($13.61 million per person in 2024)
If exceeding exemption, prepare Form 706 and consider portability election (married couples)
Gather fair market value documentation for all estate assets (appraisals, valuations, statements)
Document stepped-up basis for all appreciated assets
File within nine months of death (or request six-month extension if needed)

Asset and Deduction Documentation

Collect stepped-up basis documentation for all appreciated assets (appraisals, comparable sales, market analysis)
Track administration expenses (court costs, attorney fees, executor fees, accounting fees)
Separate medical expenses by date (pre-death vs. post-death; medical vs. funeral)
Document charitable contributions and distributions if applicable
Maintain audit trail showing cost basis, acquisition date, and FMV at death for every asset

How Afterpath Supports CPA Compliance and Planning

Afterpath’s features directly support the compliance workflow:

Asset Documentation. Afterpath guides executors to document every asset systematically. CPAs receive organized asset summaries showing description, account number, FMV at death, cost basis, and executor’s custodial status. No manual spreadsheet reconciliation needed.

Expense Tracking. Afterpath categorizes every post-death expense by type (funeral, legal, court, maintenance, utilities). CPAs export these as pre-organized deduction categories, eliminating manual categorization in tax software.

Data Export. Afterpath generates data exports in formats compatible with major tax software (ProConnect, Lacerte, etc.). CPAs import executor-compiled data directly into returns instead of manual reentry.

Deadline Management. Afterpath calculates and displays key tax deadlines (Form 1041 due date, Form 706 deadline, estimated payment due dates). Executors see deadlines; CPAs receive notifications when key dates approach.

Basis Documentation. Afterpath tracks cost basis and FMV information for every asset, creating the documentation trail for stepped-up basis audit defense.

Frequently Asked Questions

Does NC still tax estate income after January 1, 2024?

No. North Carolina General Statute 105-1.1A, effective January 1, 2024, eliminated state income tax on fiduciary income and estates retroactively. All 2024 fiduciary returns are exempt from NC state income tax. This simplifies filing (no Schedule F-2) and eliminates state income tax liability for estates, though beneficiaries still owe state income tax on K-1 distributions they receive.

When must I file Form 1041 for an NC estate?

Form 1041 is required if the estate earned taxable income (interest, dividends, rental income, capital gains) exceeding $600 during the tax year. Most estates with meaningful financial accounts trigger this threshold. The return is due April 15 of the year following the administration period, with possible extensions.

What is the difference between the final Form 1040 and Form 1041?

The final Form 1040 is the deceased person’s last individual income tax return, covering income from January 1 through the date of death. It is due April 15 of the year following death, just like a regular 1040. Form 1041 is the estate’s fiduciary return, filed if the estate earns income during administration. CPAs coordinate between both returns, strategically allocating deductions to minimize total tax burden.

What documentation should executors gather for tax purposes?

Executors should gather: cost basis information (original purchase price) for all investments, fair market value at death for every asset, all post-death expense receipts (funeral, court, legal, maintenance), asset ownership documentation (deeds, titles, statements), insurance and beneficiary designation forms, and year-of-death income statements. Afterpath guides executors to gather and organize this systematically.

How does stepped-up basis work and why does it matter for planning?

Stepped-up basis (IRC Section 1014) adjusts the heir’s basis to fair market value on the date of death. An asset purchased for $100,000 that appreciated to $500,000 by death receives a $500,000 basis to the heir. If the heir sells immediately for $500,000, there is zero capital gain and zero capital gains tax. Meticulous documentation (appraisals, valuations, market analysis) is required for audit defense.

Can a CPA work with both executors and beneficiaries without conflicts?

Yes, but conflicts must be disclosed. If the CPA’s interests diverge (executor wants to minimize estate income tax; beneficiary wants maximum K-1 income), transparency and independence protect both parties. Some CPAs refer conflicted beneficiaries to separate CPAs to avoid appearance of conflict.

What if the executor doesn’t organize financial information well?

Disorganized information increases CPA time, delays filing, creates audit risk, and misses tax planning opportunities. Afterpath solves this by guiding executors through systematic documentation and organization upfront, reducing CPA burden, decreasing error risk, and enabling better advisory work.

Related Resources

This article provides general information about estate and fiduciary tax compliance in North Carolina and should not be considered tax or legal advice. Estate tax situations vary significantly based on individual circumstances, asset composition, beneficiary status, and state of residence. The NC tax law changes described are effective January 1, 2024, and may be subject to future amendments. CPAs should consult current IRS guidance and NC Department of Revenue updates for the most recent requirements. Consult with a licensed CPA or tax professional for guidance specific to your situation.

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