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The old saying that nothing is certain except death and taxes is truer than most people realize. Federal estate taxes, state inheritance taxes, federal and state income taxes, and other taxes may all be due because of someone’s death.
It is important to have the decedent’s income tax returns for the four years prior to death. The executor or nearest relative who is handling the decedent's financial matters should verify that he or she has the returns for the last four years. If the returns cannot be found, then the accountant or tax preparer, if any, who handled the returns should be asked to provide copies.
If returns cannot be located, the Internal Revenue Service and the state tax authority can be contacted to obtain copies of returns. A specific form is filled out and a fee paid. Generally, the returns can be obtained for the last three years.
It is also important to obtain copies of any federal gift tax returns filed by the decedent at any time, copies of any estate tax return for any predeceased spouse, and copies of all trust income tax returns if the decedent was the beneficiary of any trust at the time of death.
If you have experience preparing and filing tax returns and the decedent’s financial affairs were not too complicated, you might be able to do the returns yourself. But in most cases, it will be wiser (and cheaper in the long run) to go to an accountant or professional tax preparer. If the decedent had an accountant or tax preparer, you should contact him or her. If you feel comfortable with this person, it will probably be easier to let him or her prepare any necessary tax returns than to find someone else to do them. However, if you don’t feel comfortable with the decedent’s accountant or tax preparer, you can always get someone else to do them.
What sorts of returns need to be filed? Unless the decedent was in a very low income category, he or she has had to file an income tax return every year. A return must still be filed for the year in which the decedent dies.
Has the decedent given away more than $11,000 in cash or assets to any one person during the calendar year? If so, a gift tax return must be filed although there will be not tax on the gift unless the decedent gave away more than $1,000,000 in addition to the $11,000 annual gift. The gift exemption increased on January 1, 2002 from $10,000/year per donee to $11,000/per year per donee.
If the decedent owned more than the estate tax exemption, $1,500,000 to 3,500,000, depending on the year of death, a federal estate tax return must be filed within nine months of the date of death. This is true even if no tax is due. However, the IRS will grant an extension of up to six months to file the return if necessary. In addition to the federal estate tax, many states have their own estate taxes. Some states have inheritance taxes (which are calculated differently than estate taxes.)
By their nature, taxes are complicated. Even more so than for the other concerns covered in this book, you should remember that the following information regarding tax concerns is only the most bare-bone summary. There are, quite literally, libraries of books, journals, digests, and CD-ROM’s of information on tax issues, much of which is applicable when somebody dies. As a generalization, the more money a person had, the more complicated the tax situation will be when he or she dies. But this isn’t always the case. Many wealthy people plan their estates and taxes very carefully so that their estates pass to their beneficiaries relatively smoothly with the minimum possible taxes paid. Conversely, many times the decedent is relatively poor, but has neglected to pay taxes or even file a return for years. In such situations, what little money there is in the estate often goes toward sorting out the tax problems. Whatever the situation you face, you will almost always be better off reviewing the situation with an accountant or other professional tax preparer. The following information should give you a rough idea of the issues involved and questions to ask.
When a person dies, income tax returns must still be filed. Death does not excuse tax returns or the payment of taxes.
If the decedent died early in the year and the prior year's tax returns were still due, they must be filed. Suppose John Doe dies on February 3rd. The return for the prior year needs to be filed by April 15th. Many people obtain extensions to file their tax returns. Income tax extensions can run as late as October 15th for the prior year. If a person dies with a prior year's return due, the surviving spouse, executor or other relative will still have to file the return. If an extension is needed it can be obtained, but not beyond October 15th.
An income tax return must also be filed for the period from January 1st through the date of death. If Frank Doe dies on September 29th, a return will be required for that year, but will only cover the period January 1st–September 29th. This return is due by April 15th of the following year.
Income which comes in after September 29th and deductions paid after that date will not be reported on the decedent's final income tax return. They will be picked up on an estate, trust, or surviving joint tenants return, depending on the situation at death.
Income from January 1st until the date of death is picked up on this return. Income which comes in after the date of death will be picked up on the estate income tax return or on a trust return or on the return of a joint tenant, if the asset was in joint tenancy. Deductions such as mortgage interest and taxes can only be taken off if paid prior to death. The only exception is medical expenses. If they are paid within one year of death they can be deducted on the final income tax return.
Exemptions, standard deductions, and tax rates are not prorated for the year of death. For tax computation purposes, the decedent is treated as if he or she was alive for the entire year.
If there is a surviving spouse, a joint income tax return may be filed for the year of death. If there is no spouse, the return must be signed by the executor or administrator of the decedent's estate. If there is no probate, then whoever has the assets or handles the estate is responsible for filing the return.
The return should contain the address to which the IRS will mail any future refund or notices. The top of the tax return should be labeled “Deceased” followed by the date of death.
The Internal Revenue Service has the right to audit a tax return for up to three years after it is filed. Many state tax authorities can audit up to four years after filing. If there is a tax deficiency on audit, then whoever has inherited the assets, such as the surviving spouse, executor or administrator or other relatives is legally responsible for paying the tax due.
After someone dies, the accountant or tax preparer should be contacted to prepare the final income tax returns and review any estimated tax payments for the year of death to see if these estimated tax payments should be made. If a balance is due, the balance needs to be paid with the return. Any estimated income tax payments need to be taken into account so that full credit is received. If a refund is due, IRS form 1310 should be completed and attached to the return. If a refund is payable, it will be paid
Proper accounting and income tax preparation are beyond the scope of this book. Suffice it to say, that you should keep your tax and financial information in good order and that your family should know who has prepared your taxes for the last few years.
Please click here to return to beginning.These excerpts from What to Do When Someone Dies © 2004 by Milton Berry Scott