Filing a Tax Return for a Deceased Taxpayer
When a person dies, another taxable entity is created: the estate. If at least $600, all income earned after the date of death by the decedent becomes income for the estate, which is reported on Form 1041. At least 2 tax returns may have to be filed because of the death: the decedent's tax return to report income received before death for the year of death and the estate tax return. If the decedent died before the tax return for the previous year was filed, then that tax return may also have to be filed. So, for instance, if the decedent died in April 2021 before filing the tax return for 2020, then a return must be filed for 2020 and 2021 and the estate must file Form 1041, U.S. Income Tax Return for Estates and Trusts if the income received after death was at least $600. For instance, if the decedent was working right before death and earned income of $2000, but did not receive it before death, then the estate will receive that income and pay tax on it, since the amount received is at least $600.
IRC §6501 gives the IRS 3 years after the date that the estate tax return was filed to assess additional taxes, but the personal representative can expedite the closing of the estate by filing Form 4810, Request for Prompt Assessment under IRC §6501(d) for a prompt assessment, shortening the time to 18 months.
The personal representative, who could be an executor named in the will or an administrator appointed by the court, is responsible for filing all the tax returns. If there is a surviving spouse, and no personal representative has been appointed, then the surviving spouse can file a joint return. If there is a personal representative, then the surviving spouse must obtain permission from the personal representative to file a joint return, which may save on taxes.
Note that the filing requirements, such as a minimum income, for tax returns is not prorated for the year, so tax returns will not have to be filed for those years when the requirements are not satisfied. So, if the decedent was single and at least 65, but earned less than the filing requirement income threshold (2020: $14,050) for 2020 before dying, then a 2020 return does not have to be filed, if there is no other reason to file the return, such as claiming a refund.
Any income that is received after death and any income that accrues after death if the decedent use the accrual method of accounting, plus any income received because of death, such as a liquidating distribution from a retirement account, is income in respect of a decedent (IRD), which is taxed to the estate or the beneficiary receiving the income. Any expenses paid or accrued, if the taxpayer was on an accrual basis, before the death can be deducted from the tax return for the decedent, but any expenses paid afterward are deductible only from IRD. If a check was mailed to pay the expenses, then those expenses are considered constructively paid, and are deductible on the regular tax return for the decedent, unless the check was not honored by the bank. IRD is part of the estate, so if any estate taxes are paid, then a portion of the estate tax allocable to the IRD can be deducted by the estate or by the beneficiary receiving the IRD.
Any medical expenses of the decedent, but not for the decedent's dependents, paid by the estate can be deducted either from income taxes or from the estate tax. Since most estates will not be subject the estate tax, medical expenses are deducted from income taxes, in which case, a note must be attached to the return asserting that no deduction was taken for estate taxes and that any right to do so is waived. When deducted from income, deducting medical expenses is subject to the same restraints that apply to living taxpayers, so the deduction is limited to the amount that exceeds 10% of the decedent's adjusted gross income (AGI) for the tax year.
If the decedent was a partner, then the partnership tax year ends on the date of death for that partner, and the final income tax return must include any distributive share of the partnership income and deductions. Any income or deductions after the date of death must be reported by the personal representative on the estate return or by some other successor in interest.
Estimated taxes do not have to be paid by the personal representative, since the entire amount will be paid when the estate tax return is filed, even if the estate has gross income for up to 2 years after the decedent's death, obviating the need to file Form 1041-ES, Estimated Income Tax for Estates and Trusts. However, a surviving spouse filing a joint return must still pay estimated taxes unless an amended estimated tax voucher is filed.
The decedent's final return can also be used to claim a refund if a tax return is filed either by the estate or by a surviving spouse as a joint return; otherwise, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer must be filed to claim the refund.
The personal representative signs the returns, unless it was a joint filing, in which case, the surviving spouse signs the return according to special rules, listed below.
Filing a Joint Return When a Spouse Has Died during the Tax Year
Although spouses can only file a joint return if they were married at the end of the tax year, a surviving spouse can file a joint return in the year of the death of her spouse, unless she remarries before the end of the tax year. A joint return with the deceased spouse will include the income of the surviving spouse and of the deceased spouse up until the time of death. If she does marry before year-end, then she can file a joint return with her new spouse, but must file married filing separately for the deceased spouse. A change of accounting period may also prevent a joint filing, if it results in a short tax year, or if either spouse was a nonresident alien sometime during the tax year.
To file a joint return, the surviving spouse must file the return, or, if she is not the personal representative of the estate, with the executor or administrator of the decedent's estate unless:
- the decedent did not file a tax return for the tax year;
- no executor or personal representative was appointed; and
- no personal representative or executor was appointed as of the last day for filing the return of the surviving spouse, including any extensions.
A personal representative may disaffirm a joint return by filing a separate return for the decedent, but only if it is done within 1 year after the tax return filing date, including extensions, of the surviving spouse, but the separate return will be treated as a late return, with interest and a late filing penalty assessed. The joint return that was filed will be treated as a married-filing-separately return. The IRS will then modify the surviving spouse's tax return accordingly.
If there is a personal representative for the estate, then the joint return must be signed by both; if the surviving spouse is the personal representative, then she would sign as the surviving spouse and as the personal representative of the estate; if there is no personal representative by the time the return is filed, then the surviving spouse signs the return, followed by the words "filing as surviving spouse".
One potential problem with filing a joint return with the deceased spouse is that the surviving spouse will be jointly liable for estate taxes. Joint liability can be avoided by filing a separate return. If it is later discovered that a joint filing would have been preferable, then the surviving spouse has up to 3 years after the due date to file an amended return. Another way to avoid joint liability is to delay the appointment of the personal representative until after the due date of the return, thus allowing the personal representative to disaffirm the jointly filed tax return if there is a possibility that the estate will be insolvent.
Additionally, when a spouse dies:
- Any capital assets owned by that spouse will receive a stepped-up basis, equal to the fair market value (FMV) of the assets, either at the time of death or 6 months later, depending on what the executor, usually the surviving spouse, chooses.
- If both spouses owned one or more properties, including their home, then only the portion owned by the deceased spouse receives a stepped-up basis. However, in a community property state, the entire property receives a stepped-up basis. IRC §1014
- Although a joint filing with the deceased spouse is only allowed in the year of death, the full $500,000 home sale exclusion can be claimed for up to 2 years after death. However, because the home will receive a stepped-up basis, the larger home sale exclusion likely will not matter.
- A surviving spouse who inherits an IRA or other qualified retirement plan account must follow the rules for the required minimum distribution (RMD). However, the surviving spouse does have the option of treating the IRA or retirement account as her own, which may be more beneficial, depending on the circumstances.
Qualifying Surviving Spouse (QSS) Status with Dependent Child
A qualifying surviving spouse (QSS) has a surviving spouse status. Joint return rates can be maintained for 2 years following the death of a spouse, if the surviving spouse is not remarried and maintains a household and provides more than ½ of household expenses for a qualifying dependent child, stepchild, or adopted child, but not a foster child. If an executor or personal representative has been appointed for the deceased spouse, then the personal representative must agree to a joint filing; otherwise, the surviving spouse must file as married filing separately.