When there is a death in the family, one of the last things you probably want to think about is the settling up with the IRS; however, a final tax return must be filed for the year in which the person (the decedent) died. Additionally, tax returns must be filed for any years preceding the year of death if the decedent had not done so.
For example, John Q. Public died in February 2016 before he filed his tax return for tax year 2015. His personal representative would be responsible for completing and filing two returns on his behalf: one for tax year 2015 (due on the normal date of April 15, 2016 or extension request filed by that date) and one for tax year 2016 (due on the normal date of April 15, 2017 or extension request filed by that date) that would cover the time from the start of the year until his death.
The typical IRS Form 1040 is used. Or, if the decedent would qualify, Form1040-A or 1040-EZ can be used instead. According to the IRS, “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.”
A personal representative must be named to oversee the decedent’s property and take responsibility for filing tax returns. This person is typically the person named as the executor/executrix on the decedent’s will and/or testamentary documents. If no will exists (or no executor named or the executor is unable to carry out the duties), the court will appoint an administrator to serve as the personal representative.
The personal representative is responsible for gathering all of the decedent’s assets, paying creditors, and distributing any remaining assets to heirs and/or beneficiaries. With regard to tax filing, the IRS states that the personal representative must also:
- Apply for an employer identification number (EIN) for the estate (if needed).
- File all tax returns, including income, estate, and gift tax returns, when due.
- Pay the tax determined up to the date of discharge from duties.
Apply for an EIN as soon as possible as this number will be needed on the documents you file on behalf of the decedent and the estate. You can apply for this for free at www.irs.gov (“Apply for an Employer ID Number”), and when applying online, you will receive the EIN immediately upon completion of the application.
It is important to note that funeral expenses are generally not deductible from the decedent’s income when filing the final tax return; however, executor fees and administration fees are deductible to the estate on the final return. That said, if you serve as the personal representative, any fees paid to you from an estate must be included in your own tax return as gross income for the year in which you receive them.
As noted, you must file the decedent’s return (or file for an extension) on the normal tax deadline (April 15th or the next business day when the due date fall on a weekend or other legal holiday). Include the word “Deceased” along with the date of death at the top of the return. If there is a surviving spouse on a joint return, include that person’s name and address in the appropriate fields. If there is no spouse or a joint return is not being filed, the personal representative’s name and address are included in the address field.
The personal representative signs the return. In the case of a joint return with a surviving spouse, the surviving spouse also signs the return as they normally would.
If you are the personal representative (with no surviving spouse), file the return for the place of your residence (if it is different from that of the decedent).
If the decedent would be due a refund, that money is not forfeited upon death. You would use Form 1310 to claim the refund. The IRS states, this form “does not have to be filed if you are claiming a refund and you are:
- “A surviving spouse filing an original or amended joint return with the decedent, or
- “A court-appointed or certified personal representative filing the decedent’s original return and a copy of the court certificate showing your appointment is attached to the return.”
If you inherit assets from the decedent, it may or may not be taxable. To determine any tax liability, you must first determine your “basis” in the property. According to the IRS, “The basis of property inherited from a decedent is generally one of the following:
- “The fair market value (FMV) on the property on the date of the decedent’s death.
- “The FMV of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation.”
Sale of the property is reported on Schedule D (Capital Gains and Losses) and on Form 8949 (Sales and Other Dispositions of Capital Assets). If you sell the property for more than your basis, there is a taxable gain. It’s advisable to get an appraisal for the most accurate assessment of a gain (or loss).
Estate and Inheritance Taxes
An estate tax is levied on the net value of all of a decedent’s assets, and this tax is paid by the estate prior to distribution of inherited assets to the beneficiaries. At the federal level, a filing is only required for estates that exceed $5,490,000 in 2017.
An inheritance tax is the responsibility of the recipient/beneficiary. Currently, there are only six states that impose an inheritance tax, including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each state has different laws, thresholds, and tax rates.