Death and Taxes

This is not an easy topic and I don’t like talking about it. However, when I polled all of my lovely Instagram followers, 90% of you did not know you had to file a final tax return for someone that has passed away.  Filing the tax return of a deceased person may fall on the shoulders of a family member or friend. Here are the three types of tax returns that may be needed:  Final Form 1040 All income up to the date of death must be reported on their final tax return. The IRS still wants its fair share.  If due a refund, you must file a form called ‘Statement of Person Claiming Refund Due to a Deceased Taxpayer.’  Estate Income Tax Return  When someone dies, their assets become the property of their estate. If the estate earns income after death such as interest on a bank account or dividends - you may have to file a form 1041. Form 1041 is required if the estate generates more than $600 of annual gross income. Before filing the Form 1041, you’ll need to obtain a tax ID number, i.e. EIN number.  Estate Tax Return Form 706 AKA “Death Tax” only applies to estates worth $11.4 million or more. Most estates are too small to be subject to the estate tax.  Example:  Beatrice passes away on Sept 1, 2020. Before her death, she earned 90,000 from her job, $1,000 of interest income, and $5,000 of dividend income on investments in a brokerage account. After her death, her estate receives $800 of interest income and $2,500 of dividend income. Her assets, which passed to her estate, were worth about $900,000.  At the end of 2020, two tax returns would be required.  1. A final personal tax return reporting the $90,000 of wages, $1,000 of interest income and $5,000 of dividends income earned up until her death.  2. An estate income tax return (form 1041) reporting the $800 of interest income and $2,500 of dividends paid out after death.  Because Beatrice’s estate was worth less than the $11.4M threshold, her estate is not subject to estate tax.  Who files these returns? To be legally authorized to sign on a deceased person’s behalf, you must be their personal representative  - such as the executor or administrator of the estate. This person is usually identified in the deceased person’s will. If there is no will, the court will appoint someone as administrator - which takes forever and is more costly BTW.  If these final returns are missed or not filed by the due date, the IRS may assess interest and penalties. It is an emotional time when a friend or family member dies - and dealing with their tax filing and liabilities can be challenging.  As always, reach out if you have any questions.