How to File Taxes for a Deceased Person

Once the inevitable hits, it’s best to know how to deal with it. Let us help you with the tax side.

Death and taxes are two topics that no one wants to have a conversation about. However, they are two hurdles in life that every person is eventually faced with. Unfortunately, they can arrive together – when a taxpayer dies, there needs to be a final tax return filed on their behalf. We’ll tell you who needs to do this, what needs to be reported and how to get it done.   

Who is responsible for filing a final tax return?

A final tax return will always need to be filed after a taxpayer’s death, but who needs to do this will depend on the filing status of the deceased taxpayer on the day they passed away.

Were they married?

If the taxpayer was married when they passed away, then the IRS considers the couple to be married for the entire year for tax purposes. The surviving spouse is responsible for filing the tax return. In this case, the surviving spouse would file as married filing jointly, or qualifying widow(er) with dependent child.

If the surviving spouse plans to file a joint tax return, they are only able to do so for the current tax year in which their spouse has passed. In following tax years, they must file as qualifying widow(er) with dependent child, head of household, or single.

In order for the surviving spouse to file as a qualifying widow(er) with dependent child, specific requirements must be met. The surviving spouse must have:

• not remarried during the current tax year or the next two years following death,
• had a qualifying child living with them for the entire year, and
• paid more than half the costs of keeping up a household.

The qualifying widow(er) filing status can only be used for two years immediately following the spouse’s death. In future years, they must file as head of household or single, depending on their situation.

Were they single?

If the decedent was single, then the IRS will require that a court-appointed estate executor file the tax return if the taxpayer did not choose anyone prior to the death.

If someone is filing taxes for the deceased person as neither the surviving spouse nor the estate executor and plans to claim an IRS refund, then they must file Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, along with the return. The person filing may also need to file Form 1041, U.S. Income Tax Return for Estates and Trusts, if any of the following needs to be reported:

• Income, deductions, gains or losses of the estate/trust
• Income that is either accumulated or held for future distribution or distributed currently to the beneficiaries
• Income tax liability of the estate or trust
• Employment taxes on wages paid to household employees

What information must be reported on a final tax return?

Income
The only income that should be reported on the final return is what is earned from the beginning of the tax year to the date of death. It should be reported as per usual. Income earned after the taxpayer has passed away would be reported on Form 1041, as discussed above.

Deductions
All deductible expenses paid can be written off for the tax year, up to the time of death, with the one exception being hospital and doctor bills. Any medical bills paid within the year following death are to be treated as having been paid at the time that expenses were incurred. In other words, if the taxpayer passed away due to illness, all bills incurred relating to that illness can be written off for the tax year. The full standard deduction can be taken, or deductions can be itemized on a Schedule A.

Property
The tax basis* of all inherited property is the value of the property on the date of the previous owner’s death. This rule applies whether the value is higher or lower than it was on the date of the original purchase.

*The tax basis is the value from which the heir will determine gain or loss when they sell any inherited assets such as stocks, real estate, and mutual fund shares.

Inherited IRAs and Retirement
Money in IRAs, 401(k)s, 401(b)s, and annuities is treated as income in respect of a decedent and taxed to the heir. In other words, that money is considered a taxable inheritance that the deceased person was entitled to but failed to receive because of death. The money still needs to be taxed so the heir is liable. Based on a recent law, anyone who inherits a traditional IRA has the right to roll that money over into an inherited IRA and spread distributions and tax bills out over their lifetime.

There is an exception to this rule when it comes to Roth IRAs and Roth 401(k)s. Distributions to these types of inherited retirement plans are taxed the same as distributions to the original owner. Any payout contributions or amounts that were converted from a traditional IRA come out first and are also tax-free. No taxes are due on inherited Roth distributions as long as the account had been open for at least five years at the time of the original owner’s death. According to a fairly recent law, the new owner of a Roth retirement account must do either of the following:

1. Cash out the account within five years, OR
2. Begin withdrawals based on their own life expectancy by December 31 of the year following the original owner’s death.

Savings Bonds
When it comes to U.S. savings bonds, interest accrues tax-free until they are cashed out. When the bond owner dies, there are two ways to handle the existing savings bonds:

1. Treat the accrued interest as income in respect of a decedent. With this method, the new owner is responsible for the tax on interest accrued during the decedent’s lifetime.
2. Report the accrued interest (up to the date of death) on the final tax return. With this method, the new bond owner includes only the interest earned after the decedent’s death in their reported income amount. This may be a better method of choice for those new owners who fall under a lower tax bracket than the original bond owners.

 

How to file the final return:

Preparing a final tax return on RapidTax is the quickest and easiest way to go about this process. After creating an account, you will let us know that you are preparing the return for a taxpayer who passed away that tax year by checking the box that looks like this:

Once this check box is marked, you will see additional information boxes that need to be completed based on your own information. This information includes your name, date of death, address, SSN and your relationship to them. You will then continue to report the taxpayer’s information.

Each and every one of us will experience death at some point. Whether you are the surviving spouse, estate executor or a mourning family member, it is imperative that you complete this final return as smoothly as possible. The RapidTax team is here to help you do just that! As you’re going through this final return process, feel free to reach out to our tax experts via phone, live chat or email. It’s a rough time, but we can make the tax part of it a little easier.