I am sure you have heard the famous Benjamin Franklin quote "nothing can be said to be certain except death and taxes". For some Americans, the two become truly intertwined as spouses and beneficiaries struggle to make sense of taxes after the death of a loved one. To educate my readers on the subject I have composed the following article explaining everything you will need to know about taxes after death.
The Taxpayer’s Estate
When a taxpayer passes away, a new entity known as the taxpayer’s estate is created to assure no taxes go unpaid. The taxpayer’s income will need to be included on their final tax return, which must be filed. If there is a beneficiary, then he or she may be able to pay the deceased’s income taxes on their own tax return. However, if the estate has a value of more then $600, then a tax return must be filed for the recently deceased taxpayer.
The Final Tax Return
The final tax return filing could fall in to the hands of several different persons, depending on your unique situation. If the estate had an executor or administrator, then they are typically responsible for making sure the return is filed. However, if there is none, then the closest surviving relatives must take care of it. There are no special forms that need to be filed for a taxpayer who has dies. Instead, the word "deceased" needs to be written after the person’s name on their standard return.
Due Dates
Many taxpayers trying to take care of recently deceased family member’s tax return might not think that the April 15th deadline matters. However, this is a big mistake. Even with a deceased persons tax return, the IRS deadline is still April 15th. Remember though, if you are running behind then you can always request an automatic extension.
Deductions
After death, the rules regarding deductions are a little different. Any expenses that were paid before death in the tax year can as usual be deducted on the final return. Additionally, deductible medical bills that may have incurred in the final months can also be deducted, even if they were not paid until after death.
Property
If the property of the late taxpayer is to be inherited, a few things will change on it's value and taxes as well. After the death of the taxpayer, the value of their property will be adjusted to it current market price. This is helpful for the person who inherits the property, because if they decide to sell they would only owe tax on any appreciation of the property after the death. Therefore you need to validate the date of death value as soon as possible, which can make the process even more difficult.
Savings Bonds
United States savings bonds have their own set of special rules after the holders pass. When the bonds are passed on to a benefactor, the amounted interest will need to be treated as income by the person who inherited them. They would then become responsible for paying taxes on the bonds, which would usually not be due until said bonds were cashed out. Alternatively, you could report the accrued interest on the late taxpayers final tax return. However, if this option is chosen then the person who inherits the bonds will need to pay taxes on the amount of interest at that time.
IRAs and Retirement
A big misconception about inheritance taxes is that IRAs and retirement accounts are not subject to them. Unfortunately, this is not true. With IRA inheritance, you can choose to re-title it as an “inheritance account,” roll it over into your own IRA, or have it as your own separate account. The rules may be slightly different depending on your relationship to the recently deceased taxpayer. In most cases, taxes will still need to be paid on any distributions paid out of the IRA. However, it can get very complicated and I highly recommend speaking with a qualified attorney to make sure you are fully compliant with both federal and state tax laws.