There are some events in life we all dread; therefore, we put off planning ahead for them. Regardless of how we may feel about things like ‘Estate Planning”, doing so can alleviate much of the unnecessary stress for loved-ones.
The Covid-19 pandemic took the world by storm and we can all agree that the heartbreak of losing loved-ones suddenly was very traumatic. Among the responsibilities that goes beyond the period of mourning, is dealing with the decedent’s final tax return and/or estate.
There is nothing more difficult than when someone passes away without leaving a will or final instructions. When this happens, family members, loved-ones or friends have no idea of where important documents are or what final responsibilities they have to perform.
Income Tax Return
Whoever holds the personal responsibility of handling the estate of the decedent such as an executor, administrator or fiduciary, will also be responsible for filing the final income tax return. This will be the Form 1040 or 1040-SR, for the tax year in which they passed away, if they had a requirement to file (based on income threshold) (see IRS: Do I Need to File a Tax Return?)
The final individual tax return will include all income earned, claims for any deductions as well as expenses that were paid by the decedent before death. Medical and dental expenses are among allowable deductions. Funeral costs; however, are not deductible on the final income tax return. You may visit the IRS Publication 538 for additional information regarding accounting methods.
Important Things To Note:
- If a tax refund is due to the decedent, the person claiming the refund must complete Form 1310 and submit it with the tax return.
- If you are the surviving spouse and you are filing a joint return, you do not need Form 1310. Sign and write “filing as surviving spouse” on the signature line.
- If you are a court-appointed or court-certified representative filing the original return for the decedent, then you do not have to file the form 1310. Court documents must be submitted with the tax return.
- Surviving spouse or court-appointed representative must sign the tax return.
- A personal representative can file the decedent’s return if there is no surviving spouse nor a court-appointed representative.
Estate Taxes
Estate tax is a tax imposed on your rights to transfer property at your death. In order for this tax to be determined, an accounting, using the fair market value of all assets. Everything the taxpayer owns or has an interest in at the date of death must be valued to arrive at the “Gross Estate”. (Stocks, cash, real estate, business interest, insurance, annuities, etc.)
According to the IRS, an Estate Tax return must be filed by the fiduciary of a domestic decedent’s bankruptcy estate, trust or estate. (https://www.irs.gov/forms-pubs/about-form-1041)
They are required to report the following:
- The income, deductions, gains, losses, etc. of the estate or trust.
- The income that is either accumulated or held for future distribution or distributed currently to the beneficiaries.
- Any income tax liability of the estate or trust.
- Employment taxes on wages paid to household employees.
For more information regarding filing threshold, visit the IRS’s Publication 559. This publication has a wealth of information for survivors, executors and administrators.
Estate matters require careful and detailed handling; therefore, professional assistance may be required. Probate Attorneys and Certified Public Accountants (CPAs) generally provide services in this area for those with complex estate situations.
If you need professional tax preparation services or if you have a tax debt with the IRS and need to have it resolved, schedule a call at the link below.
We will assist you in applying for tax relief such as:
- Offer in Compromise (OIC)
- Installment Agreement
- Penalty Abatement
- Release of Garnishments, Levy and other Liens.
SLS Accounting offers year-round tax and accounting services for individuals and small businesses. Claim your free consultation today!