NC Fiduciary Income Tax Return: Form D-407 Filing Guide for Estates
Most executors know they need to file a final income tax return for the person who died. Fewer realize the estate itself may need to file its own income tax return for as long as it remains open. In North Carolina, that means filing Form D-407, the state fiduciary income tax return, and the rules are different from a standard individual return.
Afterpath’s task management system tracks every tax deadline an executor faces, including Form D-407 filing dates, estimated payment schedules, and K-1 distribution deadlines. Our Pathfinder AI guide explains NC fiduciary tax requirements in plain English, and when you need professional help, our marketplace connects you with vetted NC CPAs who specialize in estate tax filings.
What Is the NC Fiduciary Income Tax Return?
Form D-407 is North Carolina’s fiduciary income tax return for estates and trusts. It is the state-level companion to the federal Form 1041 (U.S. Income Tax Return for Estates and Trusts).
When a person dies, their estate becomes a separate legal entity for tax purposes. If that estate earns income during administration, it is a taxable entity and must file its own income tax returns, both federal and state.
This is not the same as the deceased person’s final income tax return. The final return (federal Form 1040 and NC Form D-400) covers income the deceased earned while alive, from January 1 through the date of death. The fiduciary return covers income the estate earns after the date of death while it is being administered.
The Key Distinction
- Deceased’s final return (D-400): Income earned by the person before death
- Estate’s fiduciary return (D-407): Income earned by the estate after death
Both returns may be required, and they serve different purposes. For guidance on the deceased’s final return, see our article on filing the final tax return for a deceased person in NC.
When Must an Estate File Form D-407?
An estate must file NC Form D-407 if it meets either of these conditions:
Gross Income Threshold
The estate must file Form D-407 if it has gross income of $600 or more during the tax year. Gross income includes:
- Interest on bank accounts (checking, savings, CDs)
- Dividends from stocks, mutual funds, and other investments
- Rental income from real property owned by the estate
- Capital gains from selling estate assets
- Business income if the deceased owned a business that continues operating
- Any other income earned by estate assets after the date of death
The $600 threshold is low enough that most estates with any financial accounts will trigger the filing requirement. Even a modest savings account earning interest will likely push the estate over this threshold within a few months.
Beneficiary Who Is a Nonresident Alien
If the estate has a beneficiary who is a nonresident alien, Form D-407 must be filed regardless of the income level.
When You Do NOT Need to File
If the estate earns less than $600 in gross income during the tax year and has no nonresident alien beneficiaries, no D-407 filing is required. This might apply to very small estates that are settled quickly (within a few months) and hold minimal financial assets.
What Income Is Taxable to the Estate?
Estate income generally falls into two categories: income retained by the estate, and income distributed to beneficiaries.
Income Retained by the Estate
If the estate earns income and does not distribute it to beneficiaries during the tax year, the estate itself is taxed on that income. The estate reports the income on Form D-407 and pays the NC income tax.
Income Distributed to Beneficiaries
If the estate distributes income to beneficiaries during the tax year, the estate can take a deduction for those distributions. The income is then taxed on the beneficiaries’ individual returns instead of on the estate’s return.
This is where Schedule K-1 comes in. For each beneficiary who receives a distribution that includes income, the estate must issue a Schedule K-1 (Form 1041) showing the beneficiary’s share of the estate’s income. The beneficiary reports this income on their own federal and state returns.
The Executor’s Strategic Choice
The ability to distribute income to beneficiaries creates a tax planning opportunity. Here is why:
Estate tax rates vs. individual tax rates: Federal estate income tax brackets are compressed. The estate reaches the highest marginal tax rate (37%) at just $14,450 of taxable income in 2024. By contrast, an individual does not hit the 37% bracket until $609,350 of taxable income.
This means income retained in the estate is taxed at a much higher rate than income distributed to beneficiaries (assuming the beneficiaries are in lower tax brackets). Distributing income to beneficiaries before year-end can produce significant tax savings.
North Carolina’s flat rate: NC’s income tax rate is a flat 4.5% for 2024, regardless of income level. This means the state tax impact is the same whether income stays in the estate or goes to beneficiaries. The planning opportunity is primarily at the federal level.
However, if a beneficiary lives in another state with higher income tax rates, distributing income to them could increase total state taxes. This is a consideration the executor should discuss with a CPA.
NC Tax Rates for Estates and Trusts
North Carolina taxes estate and trust income at the same flat rate that applies to individuals:
| Tax Year | NC Flat Rate |
|---|---|
| 2024 | 4.50% |
| 2025 | 4.25% (scheduled) |
| 2026 | 3.99% (scheduled) |
The flat rate structure simplifies the NC calculation compared to the graduated federal brackets. Whatever taxable income remains in the estate after the distribution deduction is taxed at the applicable flat rate.
Standard Deduction
Estates are not entitled to the standard deduction that individual taxpayers receive. Instead, estates receive a personal exemption of $600 on the federal return (Form 1041). On the NC return, the starting point is the federal taxable income, and adjustments are made according to NC-specific modifications.
Filing Deadlines and Due Dates
Choosing the Estate’s Tax Year
Unlike individuals, who must use a calendar year (January 1 through December 31), estates have the option to choose a fiscal year. The fiscal year begins on the day after the date of death and can end on the last day of any month, as long as the first tax year is not longer than 12 months.
Example: If someone dies on March 15, 2024, the executor could choose a fiscal year ending on any month-end: April 30, May 31, June 30, and so on, up to March 31, 2025. Choosing a fiscal year that ends shortly after the expected date of estate closure can simplify the number of returns that need to be filed.
Most executors choose either a calendar year (for simplicity) or a fiscal year that aligns with the anticipated timeline for settling the estate.
Filing Deadline
Form D-407 is due on the 15th day of the 4th month after the close of the estate’s tax year.
- If the estate uses a calendar year: April 15 of the following year
- If the estate uses a fiscal year ending March 31: July 15
- If the estate uses a fiscal year ending June 30: October 15
Extension
If you need more time, you can file for an automatic extension using NC Form D-410P. The extension gives you an additional six months to file. However, the extension is for filing only, not for payment. Any tax owed must still be estimated and paid by the original due date to avoid penalties and interest.
Estimated Tax Payments
If the estate expects to owe $1,000 or more in NC income tax for the year, the executor must make quarterly estimated tax payments. The estimated payment dates follow the same schedule as individual estimated payments:
- Q1: April 15
- Q2: June 15
- Q3: September 15
- Q4: January 15 of the following year
Missing estimated tax payments triggers underpayment penalties. If the estate has significant income (substantial rental income, for example), set up estimated payments early.
How to File Form D-407: Step by Step
Step 1: File the Federal Form 1041 First
The NC Form D-407 starts with the federal taxable income from Form 1041. You must complete the federal return before you can prepare the state return.
Step 2: Apply NC Modifications
North Carolina has specific additions and deductions that modify the federal taxable income:
Additions (income taxed by NC but not federally, or deductions allowed federally but not by NC):
- Interest income from obligations of other states (taxed by NC, but exempt federally)
- Other NC-specific additions
Deductions (income not taxed by NC, or deductions allowed by NC but not federally):
- Interest income from US government obligations (exempt from NC tax)
- NC net operating loss deduction differences
- Other NC-specific deductions
Step 3: Calculate NC Tax
Apply the flat NC tax rate to the modified taxable income. This gives you the estate’s NC income tax liability.
Step 4: Apply Credits and Payments
Subtract any NC tax credits, estimated tax payments already made, and tax withheld. The result is the amount owed or the refund due.
Step 5: File and Pay
File Form D-407 with the NC Department of Revenue by the due date. Payment can be made electronically or by check. Electronic filing is available and generally faster.
Step 6: Issue K-1s to Beneficiaries
If the estate distributed income to beneficiaries, issue each beneficiary their Schedule K-1 by the filing deadline. Beneficiaries need this information to file their own returns.
Common Form D-407 Mistakes Executors Make
Failing to File at All
Many executors do not realize the estate needs its own tax return. They file the deceased’s final return and assume they are done. If the estate earns income during administration, this oversight creates penalties and interest that accumulate until discovered.
Missing the EIN Requirement
The estate must have its own Employer Identification Number (EIN) to file Form 1041 and Form D-407. This is different from the deceased’s Social Security Number. You can obtain an EIN online from the IRS in minutes, and you should do this as soon as you qualify as executor.
Not Making Estimated Payments
If the estate has significant income (rental property, large investment portfolio), waiting until the filing deadline to pay all taxes owed will trigger underpayment penalties. Set up quarterly estimated payments if you expect the estate to owe $1,000 or more for the year.
Ignoring the Distribution Deduction
Failing to distribute income to beneficiaries before year-end means the estate is taxed at compressed federal brackets. For estates with significant income, this can result in thousands of dollars in unnecessary federal tax. While this does not affect the NC flat rate, the federal savings can be substantial.
Filing Late Without an Extension
If you cannot meet the filing deadline, file the extension (Form D-410P) before the due date. A late-filed return with no extension triggers a failure-to-file penalty of 5% per month (up to 25%) plus a failure-to-pay penalty of 0.5% per month. These penalties add up quickly.
Working With a CPA: When It Is Worth the Cost
For simple estates with minimal income (a savings account earning a few hundred dollars in interest), an executor with basic tax knowledge and good tax software can handle Form D-407 without professional help.
For anything more complex, a CPA who specializes in fiduciary tax returns is a wise investment. Consider hiring a CPA when:
- The estate has rental income: Rental income requires calculating depreciation, expenses, and potentially passive activity rules
- The estate sells real property or investments: Capital gains calculations, especially with step-up in basis adjustments, add complexity
- The estate has a business interest: Business income, employment taxes, and entity-level returns require expertise
- There are multiple beneficiaries in different states: Multi-state tax obligations can arise
- The estate will remain open for more than one tax year: Multiple fiduciary returns compound the complexity
- The estate has significant income: The tax planning opportunities (timing distributions, choosing fiscal year) are worth professional optimization
What to Expect Cost-Wise
CPA fees for preparing Form 1041 and Form D-407 typically range from:
- Simple estate: $500 to $800
- Moderate complexity: $800 to $1,500
- Complex estate (business, rental, multi-state): $1,500 to $3,000+
These fees are paid from estate funds and are a legitimate estate administration expense. Given that tax mistakes can cost far more than the CPA’s fee, this is generally money well spent.
For more on the costs of estate administration, see our article on how much probate costs in NC and the hidden costs of probate.
How Long Does the Estate Keep Filing?
The estate must file Form D-407 (and Form 1041) for each tax year that the estate remains open and earns income above the filing threshold. Once the estate is fully distributed and closed, no further fiduciary returns are needed.
The final fiduciary return is marked as the “final return” on the form. This tells the IRS and the NC Department of Revenue that no further returns should be expected.
Timing the Final Return
Ideally, you want to close the estate and file the final return in the same tax year. This avoids filing an additional return for a short tax year. If the estate is close to being fully distributed, it may be worth delaying distributions slightly to align with the end of the tax year, or accelerating distributions to close the estate before the year ends.
This is another area where a CPA’s advice on fiscal year selection and distribution timing can save money and simplify the process.
How Afterpath Keeps You on Track
Fiduciary tax compliance involves multiple deadlines, multiple forms, and coordination between federal and state filings. Afterpath helps executors manage this complexity:
Automatic Deadline Calculation: When you enter the date of death and choose a tax year, Afterpath calculates every filing deadline, including estimated payment dates, extension deadlines, and K-1 distribution dates.
Task Reminders: Afterpath sends reminders as deadlines approach, so you are never caught by surprise. No more digging through a calendar wondering when the next estimated payment is due.
Document Storage: Store completed returns, K-1s, EIN confirmation, and all supporting documentation in Afterpath’s secure document vault. When the CPA asks for records, everything is in one place.
CPA Connection: If you need professional help, Afterpath’s marketplace includes NC CPAs who regularly prepare fiduciary tax returns for estates. You can find one who understands the specific NC modifications and filing requirements.
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