The last thing that anybody wants to think about when they lose a loved one is filing their taxes. Unfortunately, if the deceased were normally required to file, then someone would be required to file a final tax return on their behalf.
In many of these situations, the decedent may be leaving a spouse behind that is unaware of how the decedent handled their taxes. In other cases when there is not a spouse or the spouse is unable to handle the situation, the courts or the will of the decedent will appoint an executor. This person would then be responsible to file the final return or in some cases multiple returns if some had not been filed.
In this article, we will discuss when a decedent is required to file a tax return and what forms must be filed. We will also talk about some of the credits and exemptions that can be utilized on estate returns when those are required.
When Is a Decedent Tax Return Filing Required?
The first step for either the spouse or executor would be figuring out what needs to be filed. The requirements to file for a decedent are the same as for a normal tax year. The decedent would be required to file if they make more than the standard deduction for that year.
The standard deduction changes every year but for the 2020 tax year, you most likely must file if income was above $12,400 or $24,800 for those married filed jointly. This includes all money, goods, and property the deceased received from a job, pension, investments, disability payments, IRA’s, and retirement plans. For people with larger incomes, a decedent’s social security may also be taxable.
The final tax return of an individual should only cover income received up to the date of death. Income received after that, such as income received from the sale of assets sold after the date of death may have to be reported on a separate return for the deceased person’s estate or trust. If the decedent has income below the threshold, then they are not required to file but be sure to look at credits and withholdings to see if any refund would be due.
It is also especially important to make sure that tax returns for the previous years have been filed. If the decedent has not done so and has requirements, you may also have to file individual income tax returns for the years preceding the death. In such cases, you can hire a tax professional and they can do a Tax Investigation. This is when either an Enrolled Agent, CPA, or Tax Attorney can contact the IRS on behalf of the decedent and do a full compliance check and request the master tax file. If you are trying to sort this out on your own, you can also obtain verification of non-filing and certain income documents of the decedent from the IRS using IRS Form 4506-T which is called the Request for Transcript of Tax Return.
How Do You File a Decedent’s Final Tax Return?
The final tax return would be for the year of death beginning January 1st until the date of death and whatever income was received during that time up to the date of death. The filing must be done by the due date of April 15th. If this deadline cannot be met then the same extension of six months is allowed. This extension only changes the due date of the filing. If taxes are owed, they are still due by April 15th. The same 1040 tax form is used for filing and the person’s income is still taxed just as if the person was alive. The same tax rates apply and they can claim the same deductions and credits as normal.
The difference from a normal tax filing is that the word “Deceased” must be written across the top of the 1040 form along with the person’s name and date of death. If the court has appointed a personal representative, that person must sign the return. If it is a joint return, the surviving spouse must sign it. If the court has not appointed a personal representative, the surviving spouse would need to sign the return and write in the signature area “Filing as the surviving spouse”.
If the court has not appointed a personal representative and there is no surviving spouse, the person in charge of the decedent’s property must file and sign the return as the personal representative. If you are signing the tax return and are not the surviving spouse, you would have to attach the IRS Form 56 and attach it to the 1040 form. This form is used to notify the IRS of the creation or termination of a fiduciary relationship. Also, you must attach to the 1040 form a copy of the certificate that shows the official appointment as executor and a copy of the death certificate.
If the decedent was married at the time of death, the decedent and surviving spouse are considered married for the whole year for filing status purposes. A surviving spouse who does not remarry before the end of the tax year in which the decedent died may file a joint return with the decedent. The return can include the full standard deduction based on the filing status of the decedent. If the surviving spouse remarries during the year, they must file apart from the decedent. The decedent must file separately but the surviving spouse can file a joint return with the new spouse.
What If the Decedent Owes Taxes or Is Owed a Refund?
If there are taxes owed after filing, then they must be paid prior to distributing one’s estate. This can be done with a payment by check, debit card, credit card, or electronic funds transfer.
If the decedent is owed a refund and has a surviving spouse, then the spouse can claim the refund. If the taxes are being filed by an executor, the executor may claim the refund using IRS Form 1310.
Can You Take Deductions and Credits for a Decedent?
When it comes to filing the final return, the same rules apply when it comes to deductions and credits. The full standard deduction may be claimed if deductions are not itemized. Medical expenses that were paid before the decedent’s death are deductible, subject to limits on the final income tax return if deductions are itemized. This includes expenses for the decedent as well as for the decedent’s spouse and dependents.
Medical expenses that were not paid before death are liabilities of the estate and appear on the federal estate tax return, IRS Form 706. If the estate pays medical expenses for the decedent during the one-year period beginning with the day after death, the executor may elect to treat all or part of the expenses as paid by the decedent at the time the decedent incurred them. An executor making this election may claim all or part of the expenses on the decedent’s income tax return as an itemized deduction rather than on the federal tax return.
A decedent’s net operating loss deduction from a prior year and any capital losses including capital loss carryovers can be deducted only on the decedent’s final income tax return. An unused net operating loss or capital loss is not deductible on the estate’s income tax return. The individual filing a decedent’s tax return may claim any tax credits that applied to the decedent before death on the decedent’s final income tax return. Certain credits like the Earned Income Tax Credit and the Child Tax Credit would still apply even though the return covers a period of fewer than 12 months.
If the Decedent Died During Military Action
If the decedent is a member of the US Armed Forces at the time of death and dies from wounds or injury incurred while a member of the US Armed Forces due to a terrorist or military action, the decedent may qualify for forgiveness of his or her tax debt. The forgiveness applies to the tax year the death occurred and any earlier tax year in the period beginning with the year before the year in which the wounds or injury occurred. The beneficiary or trustee of the estate of a deceased service member does not have to pay taxes on any amount received that would have been included in the deceased member’s gross income for the year of death.
In conclusion, it is an emotional time when losing a loved one, and dealing with their tax situation can be challenging. I always recommend seeking the help of a true tax professional. An Enrolled Agent or a CPA has the knowledge and licensing to properly advise you and assist you in the final filing for the decedent.
If you are still trying to navigate this on your own and need more information, please check out the IRS Publication 559. This publication is designed to help those in charge of the property of an individual who has died.