When you lose a loved one, taxes may be the last thing on your mind. But the task of filing the final tax return for a deceased person may fall on a relative or a friend.
If you are liable for managing a deceased person's final business, you may need to file different income tax returns on behalf of that person. Let's look at the tax returns that can be filed, the situations that may require filing, and who is responsible for handling each.
Which income tax return should you file for a deceased person?
When a person dies, further tax returns may be required. Here are three federal income tax returns that may be required.
Final Form 1040
The first is the final Form 1040 for the deceased- the federal income tax return that everyone uses and usually expires on April 15 of each year. If the loved one had income in the year they died, the IRS still wants their share. Depending on the person's age, gross income, and marital status, you may need to complete Form 1040 on their account.
Estate income tax return
When an individual dies, their assets become the property of their estate. Suppose the deceased's estate has earned income after the date of death, such as bank account interest or investment dividends. In such a scenario, you may be required to file a second income tax return, Form 1041, for estate and trust. Form 1041 is only required if the property generates annual gross income above $600.
Estate Tax Return Form 706
In addition to the normal income tax, the second type of tax may apply to certain properties. An estate tax applies to properties valued at $ 11.58 million or more.
If a property is subject to estate tax, someone will need to file Form 706, a federal property tax return, on behalf of the estate. Most properties are too small to be subject to federal estate tax. If you can deal with a deceased person's tax problems, you are more likely to only need Forms 1040 and 1041.
A common scenario
In the rest of this article, we'll focus on Forms 1040 and 1041. Let's look at an example of how the final income tax can work.
John passed away on August 19, 2020. Before his death, John earned $ 65,000 from his job, $ 600 in interest from a bank account, and $ 2,500 in investment dividends from a bank account brokerage. After his death, his estate received an additional income of $ 500 in interest and $ 2,000 in dividends. His assets, which passed to his estate, are worth less than $ 500,000 in total.
For the fiscal year 2020, two tax returns would be required.
A Form 1040 showing $ 65,000 earned by John, $600 in interest income, and $ 2,500 in dividends received up to his death date.
A Form 1041 reporting $ 500 in interest and $ 2,000 in dividends paid after death.
Since John's assets were well below the property tax threshold, his estate would not be subject to estate tax.
Who is responsible for filing declarations of a deceased person?
To be legally authorized to file a return on behalf of a deceased person, you must be their representative, executor, or administrator of property or any person responsible for that person's property. In many cases, this person can be identified in the deceased's will as the estate's executor. If there is no will or if the executor named in the will is unable or unwilling to perform his duties, the court appoints a person as administrator.
The surviving spouse can file a joint declaration with the deceased if a personal representative has not been appointed within the filing deadline for the year of the deceased's death. However, if the surviving spouse marries before the end of the year in which the taxpayer died, they will not be able to file a joint return with the deceased spouse.
Suppose you are the deceased's representative, and you make a mistake by not completing the tax return or not completing the tax return correctly. In that case, the IRS may impose penalties, so you should take your responsibility seriously.
Bottom Line
If you need more information on filing a deceased person's tax return, see IRS Publication 559, Survivors, Executors, and Administrators. It includes instructions for completing Form 1040 and Final Form 1041.
It's an emotional time when a friend or family member passes away, and it can be difficult to deal with tax obligations. But a systematic approach and guidance from a tax professional can help you complete and file the tax returns necessary to meet your final tax obligations.
FOR MORE INFORMATION OR TO MAKE AN APPOINTMENT WITH US, PLEASE CLICK ON THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
Cypress Tax Solutions