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.