Taxes are likely the last thing you want to think about when preparing an Estate Plan, but unfortunately they must be dealt with in a timely manner. By thinking about the details of your financial affairs now, you can avoid leaving these responsibilities to loved ones. Not only can this help ease emotional stress during a difficult time, but it can protect your family from facing unexpected financial consequences. That being said, it can be helpful to understand exactly what happens if a deceased person owes taxes. While this is an uncomfortable subject, it is important to demystify the situation and learn how to handle outstanding taxes after the loss of a loved one. Keep reading to learn more about filing taxes on behalf of a deceased person and how you can prepare your own Estate for the future. If a deceased person owes taxes the Estate can be pursued by the IRS until the outstanding amounts are paid. The Collection Statute Expiration Date (CSED) for tax collection is roughly 10 years -- meaning the IRS can continue to pursue the Estate for that length of time. In some cases, the IRS can request to extend this deadline. The Administrator of the Estate, or another representative of the deceased, will need to report all income made during the year prior to their death and file the necessary deceased tax return. The Administrator will be responsible for gathering all of the deceased person’s financial details, though they can request previous tax transcripts from the IRS using Form 4506-T. In most cases, the appropriate taxes can be filed using Form 1040 to report income on behalf of the deceased. Though, an income tax return may need to be filed for the Estate as well if it generated more than $600 before being distributed to heirs. The person responsible for paying taxes on behalf of a deceased person will typically be named within the Estate Plan. This person will be in charge of settling the Estate and will have access to the information and accounts necessary to pay the outstanding taxes. They will also be in charge of coordinating any refunds, if applicable. There are a few different ways this responsibility can be managed. The Administrator of the Estate can be placed in charge of paying a deceased person’s taxes -- as they will typically be the one managing outstanding expenses, closing necessary accounts, and distributing inheritances as specified. The deceased may have an Appointed Legal Representative to handle tax affairs. This could be an Estate Planning lawyer or family attorney. They will also have access to financial information and be able to take care of outstanding taxes in a quick manner. If the decedent was married their Surviving Spouse may also take over tax duties, especially if they are filing jointly for the year. Note that taxes can be filed jointly for the year the death occurred and potentially the previous year (if the death occurred before taxes were filed). The surviving spouse would need to note this on the tax paperwork. In cases without an Estate Plan, spouse, or appointed legal representative the responsibility will typically fall on a loved one or Next of Kin. This person will need to note that they are acting as a personal representative on behalf of the deceased when filing any documents with the IRS. Are Beneficiaries Responsible for Debts Left by the Deceased?Beneficiaries are not responsible for debts left by the deceased, and by law creditors cannot treat them as such. Further, qualifying retirement accounts, life insurance proceeds, and funds placed in certain types of Trusts do not have to be used to pay for the descendants debts -- as these funds go directly to the beneficiary and do not pass through Probate. There are certain exceptions to make note of when looking at a deceased person’s debt. In community property states, such as California, the surviving spouse may be responsible for portions of outstanding debt. There are also states that may require medical debt to be paid for by the surviving spouse. Lastly, any debts that had a co-signer will need to be paid for by that individual. What Debts are Forgiven at Death?Debts are not automatically forgiven after death; instead, the Estate will be responsible for paying them. If the Estate does not have the funds to cover these amounts, the debts will often go unpaid. Federal student loans are perhaps the only exception, as these will be forgiven after receiving official proof of a death. What Happens if You Don't File Taxes for a Deceased Person?If you don’t file taxes for a deceased person, the IRS can take legal action by placing a federal lien against the Estate. This essentially means you must pay the federal taxes before closing any other debts or accounts. If not, the IRS can demand the taxes be paid by the legal representative of the deceased. There are exceptions for funeral expenses and associated administrative costs -- which can be paid before outstanding taxes on behalf of the deceased. If the decedent owes years worth of taxes, you may be able to work with the IRS to prove that you were not aware of the outstanding amounts. This will typically require the help of a tax planning lawyer or CPA. How To Prepare Your Estate for Taxes and DeathManaging the financial affairs of a deceased loved one can be challenging, especially if they are not prepared for the process. The best way to handle this responsibility is by completing a thorough Estate Plan, and encouraging your loved ones to do the same. This process will allow you to nominate a legal representative who knows exactly where to start when it comes to handling your taxes and finances after death. It can also be helpful to talk through these questions with your spouse, that way you are both protected financially in case anything unexpected were to occur. Dealing with taxes after death requires some administrative work -- and can be a hassle during an emotionally challenging time. Crafting an Estate Plan can help you address any potential confusion or challenges. Conclusion Understanding what happens if a deceased person owes taxes is a great first step in creating your Estate Plan. Learn how to get your finances in order today, so your loved ones are not left with this task. While it can be uncomfortable to talk about --- it is a necessary responsibility. Is there a question here we didn’t answer? Reach out to us today or Chat with a live member support representative!
It's the executor's job to file a deceased person's state and federal income tax returns for the year of death. If a joint return is filed, the surviving spouse shares this responsibility. For more information, see IRS Publication 559, Survivors, Executors, and Administrators. Is a Tax Return Required?If the deceased person didn't receive much income in the final year of life—less than about $12,400 for someone who was single and under 65, and less than about $24,800 for someone who was married filing jointly—you don't have to file a federal income tax return for the deceased. This minimum threshold, also called the "standard deduction," changes each year. You can check the current amounts in the IRS's Instructions for Form 1040 and the website of your state's taxing authority. Gross income usually includes money, goods, and property the deceased person received from a job, pension, investments, disability payments, and IRAs and retirement plans (except Roth IRAs). For people with larger incomes, a portion of Social Security may also be taxable. Gross income also includes self-employment income. Even if a return isn't required, file one anyway if a refund is coming. A refund may be due if tax was withheld from the deceased person's salary, pension, or annuity. Taxation of Social Security BenefitsWhether or not Social Security benefits are taxable depends on the recipient's total income and marital status. Generally, if Social Security benefits were the deceased person's only income, they are not taxable. If the deceased person received other income as well, use the worksheet in the Form 1040 instruction book to find out how much, if any, of the Social Security income is taxable. For more information, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. (Surviving spouses should know that they might be able to continue collecting Social Security benefits). Special Rules for Surviving SpousesSome special rules apply to surviving spouses. Filing a joint return. A surviving spouse may file a joint tax return for the year of the deceased spouse's death. If the spouse remarries during that year, however, file a "married filing separately" return for the deceased taxpayer. Tax benefits. A surviving spouse who has a dependent child may get an income tax break for two tax years after the death. A surviving spouse who qualifies for a special filing status, called "qualifying widow(er)," can pay the tax rate that applies to married couples. The result may be a smaller tax bill. To be eligible, you must meet these requirements:
What Forms to UseYou file a federal income tax return for a deceased person on the familiar IRS Form 1040, U.S. Individual Income Tax Return. If you're the executor, sign the form yourself, in your capacity as estate representative. If you're the surviving spouse and file a joint return, sign it yourself, adding after your signature the words "filing as surviving spouse." If you're not the executor, and one is appointed before the return is due, have the executor sign, too. If there is no surviving spouse and no executor has been appointed by the court, whoever has taken charge of the deceased person's property signs the return as "personal representative." When to File the Income Tax ReturnThe income tax return for the year in which the person died is called the final tax return, and it's due when it would have been due if the deceased person were still alive—for most people, on April 15 of the year after the year of death. If the deceased person hadn't yet filed a tax return for the prior year, you'll have to file that tax return as well. For example, if someone dies in March, before filing a tax return for the previous calendar year, two returns must be filed: one for the previous calendar year, and one for the year of death. Claiming a RefundIf you're the surviving spouse filing a joint return, there's no extra paperwork involved in claiming a refund. Anyone else filing a return on behalf of a deceased person must file additional documents.
General Rules for Income Tax ReturnsIn general, the same rules about income, deductions, and credits apply to a return for a deceased person as apply to a living taxpayer. Here are some tips:
If the deceased person was self-employed, you'll probably need to pay federal self-employment tax (reported on Schedule SE of Form 1040) in addition to regular income tax. |
Who is responsible for filing taxes for a deceased person
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