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Death of Taxpayer

Upon the death of a taxpayer, a personal representative (e.g., estate executor/executrix) takes charge of the decedent's property. This person may be named in the decedent's will or appointed by the court if there is no will. The duties of the representative include collecting all of the decedent's property, paying creditors, and distributing assets to the heirs. In addition, the representative is responsible for filing various tax returns and seeing that the taxes owed are properly paid. This section will provide an overview of some the commonly encountered issues to be resolved upon the death of a taxpayer.

Returns that need to be filed
P rovides information regarding the basic returns that may need to be filed following a taxpayer's death. .

Final Return of the Decedent
Includes general overview of what is needed to file a decedent's final return.

Surviving Spouse Remarries in Same Year
Explains the filing options for the decedent and surviving spouse.

Was Decedent Receiving Social Security Benefits?
Provides instructions on how to contact the Social Security Administration and the disposition of Social Security Payments.

Did The Decedent Own Capital Assets?
Explains steps that need to be taken to value the decedent's assets.

These and other issues involving a deceased taxpayer and the taxpayer's estate can be very complex. Please contact this office for assistance.

Returns That Need To Be Filed


The following are the basic returns that may need to be filed following a taxpayer's death, dependent on the filing requirements of each:

Form 1040 - File the decedent's final return as usual on Form 1040, 1040A, etc.

Form 1041 - This is the income tax return of the estate--used to report income on the assets in the estate, including sales of property.

Form 706 - Used to compute the tax on the value of the assets in the estate and is required if the gross estate is greater than the taxpayer's estate tax exemption. Unless reduced because of pre-death gifts, the estate tax exemption for 2000 and 2001 is $675,000 and increases to $1,000,000 for 2002 and 2003 (the exemption amount changes periodically). Sometimes it is beneficial to file when the estate is under the exemption amount.

Please contact this office for return preparation assistance

Is a Fiduciary Return Required?


Generally, income attributable to a decedent up to the time of death is included in the decedent's final individual tax return. Upon death, income that would have been attributable to the decedent is now income to the decedent's estate and reported on the estate's income tax return.

Form 1041 (fiduciary tax return) is the income tax return used for the estate. It is used to report income on the assets in the estate, including sales of property. The estate exists until final distribution of its assets. The tax year can be a calendar year or a fiscal year--the type of year is chosen when the first 1041 is filed for the estate. Once chosen, the tax year can only be changed with IRS permission.

Filing requirement - A return must be filed if the estate has gross income of $600 or more. However, if one or more beneficiaries are a nonresident alien, Form 1041 must be filed even if the gross income is less than $600.

K-1s - K-1s are filed with the 1041 for each beneficiary. A copy of the K-1 must be furnished to each beneficiary.

Because of the complexity of fiduciary returns, you should contact this office for your preparation needs.

Final Return of the Decedent


Generally, the same filing requirements apply to a deceased taxpayer as would otherwise be used if the taxpayer were still living, based on income level, age, and filing status.
CAUTION: A fiduciary return may also be required.

Refunds - If a decedent's return claims a refund, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, should be filed. However, Form 1310 is not needed if:

The person claiming the refund is the surviving spouse of the decedent, filing a joint return with the decedent, or

A court-appointed or certified personal representative is filing an original return for the decedent.

Income to Include - The decedent's income on the final return generally includes income derived up to the date of death.

Exemptions and Deductions - The general rules for exemptions and deductions apply to the final return.

Medical Expenses: Medical expenses paid before death are claimed by the decedent as itemized deductions in the usual manner. Medical expenses not deductible on the final return become liabilities of the estate--they are claimed on the estate tax return. However, expenses that were paid out of estate funds within one year after death can be treated as if paid by the decedent and claimed on the decedent's final return as well.

Net Operating Loss (NOL) Carryovers: An NOL carryover of the decedent can only be deducted on his/her final return. If the final return results in an NOL, it can be carried back to the decedent's prior year returns (just as with other NOLs).

Passive Losses: When a passive interest is transferred due to death, the accumulated suspended losses from the activity are deductible on the decedent's final return. The deduction amount is limited to the excess of the basis of the property at date of death over the decedent's adjusted basis in the property just before death.

Return Signature, Etc - The word "DECEASED," the decedent's name and the date of death should be written at the top of page one of Form 1040. If there is a personal representative, that person must sign the return. If the return is joint, the surviving spouse must also sign. If there isn't a representative and the return is joint, the surviving spouse signs the return and notes in the signature area: "Filing as surviving spouse". If the decedent had no representative or wasn't married, the person in charge of the decedent's property should sign as "personal representative.

Due Date - Due date for the decedent's return is the same as for any other taxpayer, regardless of the date of death during the year.

Surviving Spouse Remarries in Same Year


If a deceased taxpayer was married at the time of death, the deceased taxpayer will have two filing options:

File a joint return with the surviving spouse, or

File as a married taxpayer filing a separate return.

If the surviving spouse remarries before the end of the tax year, the deceased spouse is required to file married separate and the surviving spouse can either file jointly with the new spouse or married separate.

Selecting the most advantageous filing status can have a significant impact on the overall tax liability. Please call this office for assistance.

Was Decedent Receiving Social Security Benefits?


A family member or other person responsible for the beneficiary's affairs should do the following:

Promptly notify Social Security of the beneficiary's death by calling Social Security Administration toll-free at 1-800-772-1213.

If monthly benefits were being paid via direct deposit, notify the bank or other financial institution of the beneficiary's death. Request that any funds received for the month of death and later be returned to Social Security as soon as possible.

If benefits were being paid by check, do not cash any checks received for the month in which the beneficiary died or thereafter. Return the checks to Social Security as soon as possible. You can return the check to your local Social Security office.

A one-time payment of $255 is payable to the surviving spouse if he or she was living with the beneficiary at the time of death, OR if living apart, was receiving Social Security benefits on the beneficiary's earnings record. If there is no surviving spouse, the payment is made to a child who was eligible for benefits on the beneficiary's earnings record in the month of death.

Did The Decedent Own Capital Assets?


If the decedent owned capital assets, the fair market value (FMV) of those assets at the time of death must be determined for estate and probate purposes and for determining the basis of the assets in the hands of the beneficiary.

FMV is determined as of date of death (or estate valuation date). This means that if the heirs sell inherited property soon after the decedent's death, the result will usually be little or no gain. FMV will be used to figure depreciation, as well as for figuring gain or loss on sale.

Valuation of inherited property is generally taken from the estate tax return (if any) unless the taxpayer (heir) can prove a different value. If there is no estate tax return, probate papers may provide an "inventory" showing values of items in the estate.

Stocks, mutual funds and other readily traded securities: The closing value on the date death is generally accepted as the FMV. The stock listings for the date death from a newspaper will provide that information for most stocks. For more complicated portfolios, contact the brokerage firm and request a listing of all securities held by the decedent along with the closing price on the date of death.

Real Property: Depending upon state law, for estate tax and probate purposes, real property generally must be appraised by a qualified appraiser. However, if there is no requirement for probate or estate tax filing, then the executor or heirs will need to establish the FMV through other means such as a qualified appraiser or comparable sales.

The valuation process can be complicated, and it may be to your benefit to consult with this office as soon as possible for assistance.