Who Is Responsible for Filing and Paying a Deceased Person's Taxes?

 The loss of a loved one can cause significant turmoil and disruption while you are coping with the grief.

After addressing the immediate decisions, it is possible to focus on practical matters, such as distributing assets and selling property. Depending on the estate's size and complexity, multiple individuals may be involved in managing these tasks.

Let's explore the responsibilities and requirements for handling the taxes of a deceased individual.

Definition of "Deceased Person"

That's an easy one to answer.  The person is considered deceased for federal taxes on the day they actually die.  That year will be their final return.  If a taxpayer dies say in January without filing their tax returns for the prior year, they will have two more returns to file, the prior year's and the one they died if they meet the filing requirements.

Overview of Tax Liability After Death

Income tax for a deceased person is generally calculated the same as for a living person.  One difference is any carryovers of item that are not used on the final return are lost forever.  Consult with your tax advisor to ensure you receive the maximum tax benefit.

The individuals estate can be subject to federal and/or state estate taxes.  Sometimes people call these inheritance taxes.  Estate Tax Form 706 will be need to be filed if the estate exceeds the exempt amount. Although it is probably too late for a lot of tax planning after death,  you might want to consult with an estate planning attorney or other tax attorney before filing an estate tax return.  The estate will have to obtain a separate Employer Identification Number (EIN).

Additionally if the estate has any income prior to its final disposition, the estate will have to file and income tax return using form 1041.  Please note that money received by heirs is NOT taxable.  If there is any tax due it will be paid by the taxpayer or the estate.

Lastly, if the decedent made in qualifying gifts in the year of their death in excess of the annual allowed amount or failed to file a gift tax return for gifts in previous years, you will need to file a gift tax return using form 709.  You will need to file this return even if you aren't required to file an estate tax return.

It is important to gather all of the tax documents and pay all of the bills for tax deductible expenses (e.g. medical bills).  Make sure you've reported any money received after their death if it was their income.  Although loans are not generally tax items, if the decedent is owed money from someone they loaned money to, it may be written off as a loss.  Depending on the loan, if the taxpayer owes money on a loan, it could be considered income if it is forgiven.

Who is responsible for completing the task?

If you have been designated as the estate executor or administrator of a deceased taxpayer's estate, it is your responsibility to handle taxes. Only legal representative who is authorized to represent the estate can file them, such as the personal representative mentioned in the will or appointed by the court.  The surviving spouse can also file for the deceased spouse.

It is important to take the task seriously, as any mistakes or omissions can lead to penalties for which you would be responsible.

The surviving spouse has the option to file a joint return in the year of death if the couple has previously filed their personal taxes that way.

Here are the tasks you need to complete.

If you haven't previously dealt with the deceased person's taxes, you may not be aware of their financial status and whether they are required to file taxes.  You do not need to wait until the probate process is complete to file the returns, but it might be wise to do so, because often times there are additional deductible expenses.

To determine your first step, you can utilize the IRS's interactive tax assistant tool to assist you in determining the necessary information. It is important to file for the year of death and any previous years in which the deceased individual may have neglected to file.

Determine if any gift tax or estate tax returns need to be filed.  Currently (2022 amount) the annual gift tax exclusion amount is $16,000 per person.  The federal estate exclusion amount is $12.06 million (2022 amount), so probably won't be an issue.  But check your state filing requirements and exclusion amounts.  Currently, 14 states have a state estate tax.

If you are signing the return, it is necessary to complete IRS Form 56 and include it with the tax return.

Types of Tax Returns Filed By a Deceased Individual

The forms listed above pertain to federal income tax. It is important to note that unless the deceased resided in one of the nine states without income tax, a state income tax return must also be filed.

As the executor, there are various returns and unpaid taxes that you may be accountable for, including but not limited to:

• Local/city tax

• Business tax

• Self-employment tax

• Gift tax

• Estate tax

• Generation-skipping transfer tax

Time Frames for Filing Returns and Paying Tax Obligations

Form 1040 for a deceased person is due the same timeframe as normal, for most taxpayers that would be April 15th.  If the estate has income and you are filing form 1041, that return is technically due the 15th of the fourth month of the close of the tax year, which in most cases, you guessed it, April 15th.

Form 706 for Estate Taxes is due nine months after the date of death.  Gift tax returns (709) are due the earlier of April 15th of the year of the gift OR the due date of From 706.  If there is no form 706 due, then file form 709 by April 15th.

 If you are unable to pay the outstanding taxes due, you may enter into a payment plan with the Internal Revenue Service for a period of time up to five years.  Of course they are going to charge you interest.

Income Tax Return

Here are some common issues when filing form 1040 for a deceased person.

Whether to File Joint Tax Return (Married Filing Jointly)

If the surviving spouse remains unmarried in the final return, the deceased person can file a joint return although they do not have to.  They can also file married filing separately. 

An advantage of filing jointly would be to combine their deduction amounts in order to itemize deductions rather than taking the standard deductions.  A combined return might also increase the amount for your Individual Retirement Account.  Lastly, the surviving spouse may be able to utilize the carryovers of the deceased spouse such as a Net Operating Loss or Passive Activity Loss (real estate).

Disadvantages of filing jointly include possible limitations of deductions because of a higher adjusted gross income (AGI).  The surviving spouse is also wholly responsible for any tax due on the joint return.  It is best to consult with a tax professional to determine which options is best for your situation.

Standard Deductions & Exemptions for Deceased Individuals

The standard deduction is allowed in full regardless of the date of death.  The higher standard deduction for age is not allowed unless the decedent was 65 or older at the time of death.

Itemized Deductions for Deceased Persons

Generally the rules for itemized deductions are the same as for a living taxpayer as long as the deductible expense was paid prior to the date of death.  There is an exception for medical expenses.  Medical costs paid from the estate within one year of the day following the day of death can be deducted either on the form 1040 or on the estate tax form 706.  Funeral, probate, and other estate administration expenses are NOT deductible on form 1040, but can be used to reduce estate taxes if filing form 706.

Refund Due

If there is a refund due on the return, Form 1310 may be required as well as additional documentation.  If there is a estate representative appointed by the court, they will need to attach to the return a certificate showing the appointment.  A copy of a will will not suffice as documentation.  A surviving spouse filing a joint return requires no additional documentation.  If there is no court-appointed representative and no surviving spouse, form 1310 will need to be completed.

Conclusion

In conclusion, when it comes to who is responsible for paying taxes for a deceased person, it can be a complex and confusing process. However, with the right guidance and support, you can navigate through it successfully. Remember, it's important to consult with a tax professional or estate attorney to ensure that all necessary steps are taken and that you abide by the laws and regulations in your country or state. By doing so, you can honor your loved one's memory while fulfilling your responsibilities.