File a Tax Return for a Deceased Individual – 6 Tips
We’ve all heard that saying, “the only things that are certain in life are death and taxes.” When a person dies, it doesn’t relieve them of the responsibility to pay any taxes that may be due for the time they were alive.
It may be a spouse, dependent, or a parent that had earned and/or investment income that must be reported to the IRS and the respective state taxing agency. Someone needs to file a tax return and pay any taxes that are due.
Some final returns are very simple like when a deceased person may have worked one job, and had only 1 W-2 form. Many other returns can get complicated very quickly, and we always recommend that you get help from an experienced tax professional.
What needs to be done if the deceased person owes taxes?
When an individual dies, and there are taxes due, all outstanding tax returns must be prepared and filed, both federal and state returns. Taxes that are due to either must be paid as well. Plus, if the deceased individual owes taxes for a previous year, you need to file a tax return for that year too and pay all taxes as well.
I had one this past tax season. An elderly individual was suffering from dementia and had not filed a return for the previous year. Her daughter was caring for her, and the last thing on her mind was taxes.
When she discovered the previous year hadn’t been filed, she called me. I asked her to find the second previous year to make sure it had been filed, and it was. So, for the final filing, I prepared both tax years and everyone was happy.
You need to be aware, that when filing the final return for a deceased individual, it might not be as cut and dry as it appears. If the return is being filed for a surviving spouse, and you had filed married filing jointly the prior year, you can file that same way the year the spouse died.
If a dependent child is involved, the surviving widow (or widower), can file as married joint for the following two years subject to a few IRS conditions. This is important because the married filing joint rate has lower tax rates.
In cases, where the deceased individual has no surviving spouse, then a personal representative will take the responsibility of filing the final return (s). The personal representative may be an individual that is responsible for the decedent’s property or maybe a court appointed administrator.
How you should file a tax return for someone who has no estate
The first item on your agenda is to determine the last year the decedent filed a tax return. It’s very important that you find this return because it can serve as a guide for the type of income that was reported, and you’ll know what forms to look for.
It’s quite possible that you may be required to file two years returns if the individual died early in the tax year.
Gather all forms for income, tax credits, and deductions
Just as you would for preparing your own tax return, gather together all of the necessary forms for the decedent, such as W-2, Form 1099. By using the last return filed, you can have a good idea what to look for when you file a tax return for the decedent.
If you happen to be a beneficiary of the decedent’s estate, it sometimes happens that a portion of the income owed to the decedent must be reported on your personal return. Sometimes individuals make an investment in a small business and a Form K-1 is issued.
Some of those forms can be confusing at best, and you’ll be glad that you engaged the services of an experienced tax professional.
File a tax return at the IRS, state, & local
Now that you’ve gathered all of the information available, you’re ready to complete and file the tax returns. There are certain states that require additional filing, so you need to be aware of that.
As an example, if the decedent lived in Pennsylvania, you could possibly have a state, city, township, or maybe borough returns to file.
Usually filing the final tax return for a decedent is as simple as filing a married filing joint return. Plus, you may itemize deductions or file using the new and higher standard deduction.
There are certain cases where filing the deceased person’s final return that could have an effect on your tax return. As an example, if you’re filing a final tax return for someone who was your dependent, you’ll still be able to claim that person on your return, even if they died very early in the tax year.
Pay all taxes due and/or collect all refunds
As soon as the tax returns are filed, make sure that any taxes that are due are paid to the appropriate agency. If there is a refund on a return that is filed married filing jointly, make sure that it is a direct deposit to a bank account to avoid getting a check in the mail.
On other returns that are filed and there is a refund due, make sure to attach Form 1310. This notifies the IRS who you are and the reason for claiming the refund.
In cases where you have been appointed as an executor or a personal representative of an estate, be VERY SURE that all taxes, federal or state have been paid in full before distributing any assets to beneficiaries. If you don’t, you can be held liable for them personally.
This is one of the most important factors to remember as a representative of an estate. Sometimes, relatives, beneficiaries, will try to pressure you into giving them “their share” of the estate. But never cave in – it could cost you a bundle!
There are a number of different taxes that may come into play when they die. Gift tax, Estate tax, Self-employment tax, Local tax, State tax, Federal tax, and even a Generation skipping transfer tax. Some are very rare, but you still need to be aware of them.
In a vast majority of cases, most decedents only have to file a tax return for federal and state taxes due which makes filing their tax returns relatively straight-forward. However, be aware that some decedents will have more complicated tax returns, and a number of other types of taxes may be involved.
This is why it’s so critical to engage the services of an experienced tax professional to help you get through the complicated maze of tax forms.
If there is an estate involved, what do I need to do?
As we mentioned above, the majority of deceased persons will not owe any estate taxes. For 2020, the value of the estate must be over $11,580,000 before any estate tax could be due. Normally, if the estate exceeds that value, an estate attorney will be handling it. If I were the executor, I can guarantee an estate lawyer would be doing it.
When the estate value is below the $11,580,000 amount, normally you do not need to file a tax return. Above that filing threshold, the attorney would file the estate tax return. The attorney would also advise if the estate was liable for any other type of tax, such as a gift tax return on a recent financial gift to a grandchild or one of the children.