Nobody likes to do their taxes, but the task is even more difficult when preparing returns for the death of a spouse or a death certificate. If you are preparing a 1040 federal tax return for a spouse or parent, you are in mourning while also gathering the needed tax documents. If you are the administrator of an estate, you may not know the deceased's tax history or access important documents. To make it easier for you, we decided to come up with this article that focuses on the difference between filing a deceased person's tax return and the usual Form 1040 and the pitfalls to avoid when preparing the return.
Know their marital status
The surviving spouse will file a joint return for the year of death and will enter in the signature area: "Filing as a surviving spouse." The spouse can also file a joint return for the following two fiscal years if he or she has dependents and is yet to remarry. This special provision for qualified widow(er)allows the surviving spouse to benefit from the common advantages of a joint return, such as the highest standard deduction.
Get permission to File.
If there is no surviving spouse, someone must be chosen to file the tax return. Options include the executor if there is a will, the estate administrator if there is no will, or the person responsible for administering the deceased's estate.
You will need access to financial statements to prepare the statement or provide the necessary information to an accountant. Almost all financial institutions will request a copy of the death certificate before releasing the information.
Find the previous year's return.
This is your starting point. This is the document checklist for the current year. If it's a paper return, you need to find it. Filing returns electronically can be complicated if you don't know the password to access the software your spouse is using or if you can't start the deceased's computer where the files are stored. A crucial step in estate planning is to give your passwords to a trusted person or instructions on how to access this information after your death.
If you can't find last year's tax return, you can file Form 4506-T with the Internal Revenue Service to request a transcript of the previous tax return. The transcript summarizes what was in return, including filing status, taxable income, tax payments, and more. The IRS can also provide source documents, such as a W-2 or 1099-INT from a bank or a Form 1099-R for the pension distribution from a union, any document submitted to the IRS on your behalf that can help you know what documents to collect.
Update the address on the return
If you are not a surviving spouse or did not live with the deceased, be sure to update your tax return to include your address as the "in care" address. This way, all correspondence with the IRS will come directly to you.
Assess medical expenses
The medical expense deduction is the amount that exceeds 7.5% of adjusted gross income. Many people are lucky enough not to reach this limit. But if the deceased suffered from a chronic illness, medical costs could increase. Staying in hospitals, nursing homes, and care from aides can push medical bills into the deductible territory.
Get extra time to file and make payments.
There is no special treatment because someone is deceased; however, the executor or surviving spouse may benefit from the provisions available to all taxpayers. If you don't file on time, request an extension and do your best to estimate the tax burden. This will give you the space you need to gather the documents needed to file the taxes. Additionally, the IRS can grant you a penalty waiver for not filing because, for example, you're handling funeral arrangements and grieving. Still, you must provide reasonable grounds for that to happen.
If the funds are tied to the estate, contact the IRS to make arrangements to pay the taxes due to overtime. Please note that interest will be added.
The executor or agent never has any problems with the taxes owed. If the assets are not enough to pay the taxes, the administrator has no obligation to take money out of pocket to pay the taxes on behalf of the deceased taxpayer.
Limit the time the IRS has to assess your taxes
The Internal Revenue Service has three years to determine if you paid the exact amount for that tax year. But you can reduce that time to 18 months by filing Form 4810, which is a request to the IRS for an advance tax assessment. You risk losing a 1099 or other documents when you file by inadvertently understating your earnings. If you do not file Form 4810, the IRS may notify you of taxes due up to three years after, possibly after the distribution of real estate funds.
You may be filing multiple returns.
If someone dies early in the year, say January or February, you may have to file last year's tax return and this year's tax return. It may not meet the filing requirements, but it is fine to go ahead and do it, just to close things out. But you should at least consider that there may be a filing requirement for the short period of time that the person was alive this year.
The other situation is that the deceased did not file a return from a previous year, possibly because he or she was very ill. You most probably won't know until you get notices from the IRS saying they did not receive the previous return from the deceased. This is another important reason to file Form 4810, which requires the IRS to have only 18 months to assess the taxes as you wouldn't want any surprises.
You may also need to file a tax return or a Form 1041 for the estate if it earned more than $600.
Be Aware of Estate Taxes
Form 706 must be filed if the deceased's gross assets are valued at $11.7 million for 2021 or more than $12.06 million for 2022. The IRS is looking at the whole financial picture: real estate, brokerage accounts, IRA. However, this is a high limit. A lot of the time that doesn't apply to the average person.
The tax preparer should also be aware of any estate taxes levied by the state in which the deceased lived.
Consider Hiring a Professional
If all of this sounds confusing, you might want to hire a CPA or tax attorney. A deceased person's return will be more complicated than what you filed last year with your spouse, or you can start over if you are preparing for the return for an aunt. A tax expert will know what information you need. If you have the right professional who can guide you in the right direction, you can save money, for example, by deducting medical expenses or not paying fines that you may have overlooked if you did not file the correct form or if you missed something.
Also, consider the emotional side. Now is a good time to seek out a professional to help you with the tough stuff so that all of that burden doesn't fall on the individual. Estate management and tax filings can be overwhelming when a person is in mourning. It will be very important to get as much help as possible from people you trust.
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