When a person dies, it may be necessary to file an income tax return for the decedent's last year.  This article explains when that is necessary and how to do it.

That tax return is separate and apart from the possible need to file an estate tax return and for the estate to file its own income tax return.  The estate tax return only needs to be filed if the value of the estate – the net total of all assets - exceeds a certain amount.  That amount is subject to change and may be found in the instructions and publications updated by the Internal Revenue Service (IRS)  from time to time.  In such cases, a Form 706, United States Estate Tax Return, is required.  Additionally, the estate itself may have to file an income tax return using Form 1041, U.S. Income Tax Return for Estates and Trusts.  IRS Publication 950, Introduction to Estate and Gift Taxes, provides guidance and instructions on how to handle the income taxes of an estate.  The focus here is only on the final U.S. Individual Income Tax Return.  Look elsewhere for guidance on estate taxes and income taxes for estates.

Who Should File the Final U.S. Income Tax Return

The decedent’s final U.S. individual income tax return is separate from the filing of an estate tax return.  The filing requirements for the decedent are the same as those that apply for all other individuals.  If a taxpayer died before filing a return for the year, the taxpayer's spouse or personal representative may have to file and sign a return for that taxpayer.  A personal representative can be an executor, administrator, or anyone who is in charge of the deceased taxpayer's property.  An executor or executrix is generally named in the decedent’s will, while an administrator is normally appointed by the court if there is no will, if no executor was named in the will, or if the executor named in the will cannot or will not serve in that capacity.  The surviving spouse may or may not be the personal representative, depending on the terms expressed in the decedent’s will or a court appointment.

Joint Return

If the surviving spouse and the decedent qualify to file a joint return for the year of death, the joint return can be filed by the personal representative and the surviving spouse.  But the surviving spouse may be able to file the joint return on his or her own, if no other personal representative has been appointed by the due date for filing the return.  This also applies to filing a return for the preceding tax year if one spouse died after the close of the year but before filing a tax return.  But if the surviving spouse remarried before the end of the tax year of the decedent’s death, a joint return cannot be filed with the decedent.  In this case, the former spouse’s status with the decedent is married filing separately.

A personal representative named by the court can revoke an election by the surviving spouse to file a joint election, and can choose to file separate returns, one with the decedent’s income and the other with the surviving spouse’s income for the year.

Decedent as a Dependent

If the decedent qualified as your dependent on the date of death, you can claim the full amount of the dependent exemption on your tax return, regardless of the date of death.

How To File

The person who files the return, should write “DECEASED”, the decedent’s name, and the date of death across the top of the return, and if it is the surviving spouse, "Filing as surviving spouse" should be entered in the area where you sign the return.  If a joint return is being filed and someone else is the personal representative, he or she must also sign.

If a joint return is not being filed, the decedent’s name should be written in the name space on the return, and the personal representative’s name and address should be included in the remaining space, and the personal representative should sign the return. If no personal representative has been named, and there is no surviving spouse, the person who is responsible for the decedent’s property should sign the return as “personal representative”.

The decedent’s final income tax return is due on the same date if would have been due if he or she had lived.  Generally, you must file the decedent’s income tax return with the Internal Revenue Service Center for the area where you live.  The decedent’s return can be filed electronically, and the personal representative can apply for a filing extension.

Filing to Claim A Refund

If the deceased taxpayer did not have to file a return but had tax withheld, a return must be filed to get a refund.  Tax may have been withheld from salaries and wages, pensions and annuities, or estimated tax payments may have been made.  The decedent may also have been entitled to a refund from taking the earned income credit or some other refundable credit.

If a return is being filed for a decedent to claim a refund, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, with the tax return.  But this form does not have to be filed by a surviving spouse who is filing a joint return, or by a court-appointed or certified personal representative who is filing an original return for the decedent.  But the personal representative should attach a copy of the court certificate on which he or she was appointed.

Responsibilities of the Personal Representative

The personal representative is responsible for collecting all the decedent’s assets, paying creditors, and distributing the remaining asserts to the heirs and beneficiaries.  The personal representative will also be responsible for notifying the IRS that he or she is acting as the personal representative, filing federal and state tax returns and paying any taxes due, and notifying the payers of interest, dividends, or other amounts of the taxpayer’s death and providing the names and taxpayer identification number of the new owners.  A deceased taxpayer’s social security number can be used for the tax year of his or her death, but after that, it should only be used for estate tax return purposes.

A person acting in a fiduciary capacity for a deceased person should file Form 56, Notice Concerning Fiduciary Relationship, with the IRS.  This form can be downloaded from the IRS website.

Reporting Income

In general, the same rules for reporting income and expenses for tax purposes apply to a decedent in the same manner as they would apply if the person were living.  Nevertheless, the date of death can mark a changeover of ownership, or the right to certain types of income, and certain amounts may have to be prorated for the portion of the year the decedent was alive.

Interest and Dividend Income

Separate Form 1099s should be received for the portion of the year up through the date of death, and for the remainder of the year, after the date of death.  If the forms do not show the correct distribution of earnings to the right beneficiaries, corrected forms can be requested from the paying institution.

If you are preparing the decedent’s income tax return and it is not possible to obtain a separate 1099 for the period after death, you should report the total amount from the 1099 on Schedule A if you are filing Form 1040, or on Schedule 1 if you are filing Form 1040A.  Then you should separately show the portion of the interest or dividends that belong to another recipient (for the period after the date of death) as a negative amount, identifying it as a “Nominee Distribution”, or a similar description.

Coverdell Education Savings Account (ESA)

The balance in a Coverdell Education Savings Account must be distributed within 30 days after the individual for whom the account was set up reaches age 30, or dies, whichever is earlier.  How the portion of this distribution that constitutes earnings is reported depends on who acquires the interest in the account.  If it is the decedent’s estate, then the earnings must be included on the decedent’s final income tax return.

If someone else acquires the interest, then the earnings would fall into the category of ”Income in Respect of the Decedent”.  If the surviving spouse or another family member is the designated beneficiary, that person becomes the owner of the ESA.  If another person, including a family member, who was not the designated beneficiary receives the distribution, the portion of the distribution corresponding to earnings is taxable to that person.  The distribution will be deemed to have been made at the end of 30 days.  The amount that must be included in income can be reduced by any qualified education expenses of the decedent that are paid within one year of the date of death.

Archer Medical Savings Account

The tax treatment of the balance in an Archer Medical Savings Account would also depend on who acquires an interest in the account.  If the account goes to the decedent’s estate, the fair market value of the assets in the account must be included in the decedent’s final individual income tax return.

If a beneficiary acquires the interest, the “Income in Respect of the Decedent” rules apply.  If the decedent’s spouse is the beneficiary, the spouse becomes the owner of the account.  Any other beneficiary, including the spouse if he or she is not the designated beneficiary, must include the fair market value of the assets in the account in his or her individual income tax return.  The amount that has to be reported as income can be reduced by any qualified medical expenses paid for the dependent within one year of the date of death.

Reporting Exemptions, Deductions, and Credits

The decedent’s personal exemption can be claimed in full on the final income tax return, provided the decedent could not be claimed as a dependent on someone else’s tax return.  If deductions for the decedent are not itemized, the full amount of the standard deduction is allowed regardless of the date of death.

Unrecovered Investment in Pension

If the decedent was receiving a pension or annuity and died without a surviving annuitant, you can take a deduction for the decedent's investment that was not recovered.  This deduction is a miscellaneous itemized deduction subject to the 2% of adjusted gross income limit.

Net Operating Losses and Capital Losses

A net operating loss carried over from a prior year, and any capital losses, including carryovers, can only be deducted on the decedent's final income tax return.  If the decedent’s final income tax return results in a net operating loss, this loss can be carried back and applied against taxable income for the prior three years.  You cannot deduct any unused net operating loss or capital losses on the estate's income tax return.

Credits

Any income tax credits for which the decedent was eligible at the time of death may be claimed on the final income tax return.

The Decedent and Others

The personal representative who handled the decedent’s estate will also probably assist in  coordinating the tax reporting requirements for the decedent, his or her estate, and a surviving spouse, dependents, and beneficiaries.

Gifts, bequests, and inheritances received are not included in the receiving person’s taxable income. But if the property you receive yields income, such as interest, dividends, or rent, that income would be taxable to you.  And if what you receive as a gift, bequest, or inheritance is in itself taxable income, you will have to report it on your tax return.

Income in Respect of The Decedent

All the income the decedent would have received had death not occurred and that cannot be reported on the decedent’s final income tax return, is considered income in respect of the decedent.  This income must be reported by:

• The decedent’s estate,
• The beneficiary, or
• Any person to whom the estate distributes the property.

If you have to include income in respect of a decedent on your individual income tax return, you may be able to claim a deduction for estate tax paid on that income, if an estate return is filed.

Whether or not you have to report income in respect of the decedent depends on whether the decedent was reporting for tax purposes on a cash basis or accrual basis.  If reporting was on a cash basis, any payments received after the date of death would be income in respect of the decedent.  They would have to be reported by the person who the estate assigned to right to collect, if payment had not yet been made by the time the estate was settled.

If the decedent was on the accrual basis and had earned the income before death, then that earned income would be reported on the decedent’s final income tax return, regardless of when or who collected it.

If a person was entitled to a large salary payment at the time of death, that was to be made, for example, in four annual installments, and after receiving two of these installments, the estate transferred the right to receive the other two installment to you as beneficiary, none of the installments would be includible in the decedent’s final income tax return.  The estate must include in its income the two installments it received, and you as the beneficiary, must include the other two installments in your income when you receive them.

Transferring Your Right To Income

If you choose to transfer your right to income in respect of the decedent to someone else, you must include in your taxable income the lesser of:

• The amount you receive for transferring the right, or
• The fair market value of the rights at the time your transferred them.

If you give the income you receive in respect of the decedent to someone else as a gift, you must include in your income the fair market value of that right at the time you make the gift.

Type of Income