Someone trusts you so much that they name you to settle their estate when they’re gone. You’re honored they have that much confidence in you, but you don’t think much about what’s involved.
Among the long list of items you have to deal with is settling the deceased’s tax bill. You may have to file just one return for the person who’s passed away, but there could be several.
Individual Tax Return
Typically, you’ll need to file a tax return for the deceased, assuming they earned enough income in their final year to require the filing of a return. You’ll file IRS Form 1040. Unless the deceased lived in one of the nine states with no state income tax, you’ll have to file a state income tax return as well. Some states require a death certificate sent to them along with the federal return.
Form 1040 will report any income earned through the date of death and will also notify the IRS that the individual has died. In most cases, this return is due on the same date as if the individual was still alive, typically April 15th.
All income up to the date of death must be reported and all credits and deductions to which the decedent is entitled may be claimed. Whether using Form 1040 or 1040-SR or if the decedent qualifies for Form 1040 EZ, you will list the date of death at the top of the form. If there is no surviving spouse, then the executor, trustee, or administrator must file Form 56 telling the IRS that they are the person responsible for the final tax return.
Depending on the time of year the individual died, two individual returns may be required. For instance, if someone dies in February 2024:
- One return has to be filed by April 15, 2024, to report income for the 2023 tax year.
- The second will be filed by April 15, 2025, reporting income from January 1, 2024, through the date of death.
If you can’t get all the paperwork done in order to file by the tax deadline, you can file an extension to October 15. But even with an extension, any money owed to the IRS has to be paid by April 15.
Past Due Taxes
If the deceased wasn’t up-to-date on their personal income tax filings, you are responsible for filing tax returns for any outstanding years and making sure the estate pays any outstanding taxes, penalties and interest. You can obtain verification of non-filing and certain income documents of the decedent from the IRS using IRS Form 4506-T, Request for Transcript of Tax Return.
If there is a surviving spouse, that person can file a joint return with the status of married, no matter when the death occurred that year. One exception to that rule—if the surviving spouse remarries before the year of death is over, then the status for the deceased taxpayer’s return has to be married filing separately.
Decedent Refund
If the decedent is due a refund from the IRS, the executor files a Form 1310, “Statement of Person Claiming Refund Due a Deceased Taxpayer.” The IRS will issue the refund to the deceased’s estate or trust. A surviving spouse is not required to file Form 1310.
Required Minimum Distributions (RMD)
Since all income of the deceased has to be reported, that includes any IRA Required Minimum Distributions. If the deceased had not taken their RMD for the year at the time of their death, the RMD must be distributed before it can be rolled over to a beneficiary.
Medical Expenses
Medical expenses for the deceased should also be considered on the final tax return. It’s not unusual for medical bills to come in after the person dies. For those expenses to be considered deductible:
- The medical bills must be paid out of the decedent’s estate
- Total medical expenses must exceed 7.5 percent of adjusted gross income
- The tax return must be itemized
Fiduciary Income Tax Returns for the Estate and/or Trust
Depending on the amount of income earned from investment assets, a Fiduciary return, IRS Form 1041, might need to be filed instead of Form 1040. Determining whether a Fiduciary return is required is fact-specific and often complex, so it’s advisable to consult a professional who’s experienced in preparing fiduciary income tax returns.
The deadline for filing a Form 1041 varies depending on whether the entity for which the return is filed elects a fiscal year or calendar year. Estates typically elect a fiscal year, which begins on the date of death and ends on the last day of the month prior to the anniversary of the individual’s date of death. For instance, if a person dies on February 23, 2024, the fiscal year runs from February 23, 2024 through January 31, 2025.
If the individual had a revocable living trust, it might be possible to report the trust income on the same return as the estate’s return for the first two years following death. Otherwise, a trust must report its income on a calendar year basis.
Whether a fiscal year or calendar year is used, the return is due three months and fifteen days after the close of the tax year. A return will need to be filed for each year the estate or trust remains open, and a final return will be filed for the year any remaining estate or trust assets are fully distributed. The beneficiaries will receive a Schedule K-1 reflecting any income or deductions they need to report on their personal income tax returns.
Estate Tax Return
An estate tax return is IRS Form 706. It reports the value of assets owned by an individual at the time of death and assesses any estate tax owed.
The lifetime estate exemption amount changes from year to year. The estate tax will be based on the exemption existing at the time of death, the amount of exemption the individual used during their lifetime through gifting, the recipients of the individual’s assets at the time of death, and whether the individual received any “Deceased Spousal Unused Exclusion” which would have been received from the estate of a deceased spouse.
If an estate is considered taxable, along with Form 706, Form 8971 may be required as well as Schedule A. It will be due no later than 30 days after Form 706 was due or no later than 30 days after Form 706 was filed.
Gift Tax Return
If the deceased individual made a taxable gift in the year they died, you will need to report it on a gift tax return, IRS Form 709, which is generally due April 15 of the year following the gift.
Gift tax returns don’t need to be filed unless the deceased gave someone other than their spouse money or property worth more than the annual exclusion amount.
More Information
IRS Publication 559 contains a lot of information about filing a final return if you intend to do it yourself. Keep in mind, as the person responsible, you take on some financial risk and any mistakes may come back on you. It’s always a good idea to consult a tax professional who’s familiar with the rules.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice, or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
