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Death and Taxes: What You Need to Know

Dealing with the loss of a loved one is difficult. Unfortunately, there are often many tasks to complete while working through your grief. In addition to making arrangements and notifying everyone, you may also need to file the decedent’s final tax return. If you’re not sure what to do or where to start, we encourage you to read through our list of most common questions regarding death and taxes. It will help you identify who is responsible for filing a return, paying any taxes due, or claiming a refund.

Who Should File For The Deceased Taxpayer?

The responsibility for filing the final return for someone who has died typically falls to the executor, estate administrator, or the surviving spouse. If the deceased was not married and there is no executor/administrator named, another survivor or personal representative should complete the return.

Do I Need to File a Final Federal Income Tax Return?

Maybe. In general, the final income tax return for the deceased taxpayer is prepared and filed in the same manner as when they were alive. All income up to the date of death must be reported. The decedent’s return should also include all credits and deductions they are entitled to claim. If the decedent has unfiled tax returns, those should also be completed and filed.

If the decedent has income below the minimum required threshold (also known as the standard deduction), a final federal income tax return isn’t required. The personal representative or surviving spouse may still wish to file if a tax refund is due.

Can I File a Joint Return?

The surviving spouse may file a joint tax return for the year of the decedent’s death. They may also be eligible to file as a qualifying widow(er) for up to two years following the final joint return if the following are true:

  • The spouse is entitled to file a joint return with the spouse for the year of their death
  • The spouse did not remarry before the end of the current tax year
  • They have a child, stepchild, or foster child who qualifies as a dependent
  • They provide more than half of the cost of maintaining their home (child’s principal address)

If the surviving spouse remarries during the year of the decedent’s death, they are no longer eligible to file a joint return with the decedent. The decedent’s return must be filed under the “married filing separately” status.

In situations where the spouse is not handling the estate, they should always coordinate filing their joint return with the estate executor or administrator.

What Happens If The Person Dies Before Filing This Year’s Taxes?

If the decedent dies at the beginning of the year before filing that year’s tax return, the final return would be the return due the following year, not the one currently due. In this case, the spouse or representative may need to file two tax returns.

For example, Mary’s husband Joe died on March 17, 2021, and they did not file their 2020 tax return yet. Mary would need to file those taxes by the filing deadline (currently May 17). She would also be eligible to file “married filing jointly” for her 2021 taxes (final tax return) due next year if she does not remarry in 2021.

Who is Responsible For Paying Any Taxes Owed?

Any taxes owed should be covered by the decedent’s estate. If there are insufficient funds to cover all debts, federal income and estate taxes must be paid first. If there is still a tax balance, relatives are not responsible for paying any taxes owed. A surviving spouse could be responsible for back taxes owed from unfiled joint returns or taxes due on the final joint return.

An executor may also be held personally responsible for the tax debt if they distributed assets or paid other debts before paying taxes, or they were aware of insufficient funds and spent the assets anyway.

How Do I Claim a Refund For a Deceased Person?

If the decedent is due a refund, and no surviving spouse is filing a joint return, the personal representative may claim the refund by filing IRS Form 1310, Statement of Person Claiming a Refund Due a Deceased Taxpayer. The refund will be distributed to all surviving heirs or beneficiaries.

Although surviving spouses are not required to complete Form 1310 when filing a joint return, it’s a good idea to include it to avoid potential refund delays.

Do I Need to File Form 1041?

When someone passes away, their assets become the property of their estate. If that estate generates more than $600 in annual gross income, IRS Form 1041, U.S. Income Tax Return for Estates and Trusts must be filed. Examples of assets that may generate income include, but are not limited to:

  • Bank accounts
  • Certificates of deposit (CDs)
  • Stocks
  • Bonds
  • Mutual funds
  • Rental property

The decedent and their estate are separate entities. A federal income tax return (Form 1040) and Form 1041 may need to be filed. In some cases, however, one or neither may be required. If Form 1041 is needed, the estate’s representative will need to request an EIN (estate’s tax ID number). This may be done by mail, fax, or online through the IRS website.

If income is distributed to beneficiaries through the estate, it must be reported on Schedule K (Form 1041).

What About State Taxes?

If the decedent lived in a state where income tax returns are required, you may need to file a final state income tax return, as well. It’s best to check with the state’s department of revenue to determine what forms, if any, are required. 

Will I Owe Estate Taxes?

Due to recent wealth tax changes, you’re unlikely to owe any estate taxes. For 2020, estates that are worth less than $11.58 million aren’t required to pay a federal estate tax. Estates that exceed that amount will need to complete IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

Death and Taxes: IRS Forms Checklist

Below is a quick checklist of the forms you may need when handling a decedent’s final income and estate tax returns.

  • W-2s and 1099s (or other tax forms that report expenses paid or income earned by the decedent)
  • Death certificate (you may need to submit this with your income tax returns)
  • IRS Form 56 – This form creates or terminates your fiduciary relationship to an individual, or a decedent’s estate or trust.
  • IRS Form 1040 (Form 1040, 1040-SR, or 1040-A) – Write “Deceased,” the decedent’s name and date of death at the top of the form.
  • IRS Form 1041, U.S. Income Tax Return for Estates and Trusts – Must be filed if the estate earns more than $600
  • IRS Form 1310, Statement of Person Claiming a Refund Due a Deceased Taxpayer

It’s a good idea to speak with an experienced tax professional to ensure you are not only completing the necessary forms, but also taking advantage of any available tax credits and deductions.

If you’re grieving the loss of a loved one, our caring tax specialists can take the burden of filing your loved one’s final tax returns off your shoulders. Call Tax Defense Network today at 833-803-4222 for your free, no-obligation consultation!