Upon the death of an individual, a representative, named in the taxpayer’s will or appointed by the court if there is no will, takes charge of the decedent’s property. The representative is responsible for filing tax returns and seeing that taxes owed are properly paid. The representative also collects all of the decedent’s property, pays creditors, and distributes assets to the heirs.
If the decedent owned capital assets, the fair market value of those assets at the time of death will need to be determined. That value, as of the date of death, is used for estate and probate purposes and for determining the basis of the assets in the hands of the beneficiary. FMV is also used to calculate depreciation and figure gain or loss on sale.
Unless the heir can prove a different value, valuation of inherited property is taken from the estate tax return.
Depending on state law, real property usually has to be appraised by a qualified appraiser. The valuation process can be complex. You may greatly benefit from consulting with us as soon as you have a need.
Readily Traded Securities (including Stocks and Mutual Funds)
The closing value on the date of death is the FMV, easily found in stock listings in the newspaper from that date. Contact the brokerage firm and request a listing of all securities held by the decedent along with the closing price on the date of death for more complex listings.
Returns That Need To Be Filed
The following basic returns may need to be filed following a taxpayer’s death:
Form 1040: File the decedent’s final federal return as usual. An equivalent return for the decedent’s state of residence may also be required.
Form 1041: This is the federal income estate tax return which reports income received on the assets in the estate, such as sale of property. An equivalent return for the decedent’s state of residence may also be required.
Form 706: This form determines the tax on the value of the assets in the estate and is required if the gross estate is greater than the taxpayer’s estate tax exemption. A state estate tax return may also be required.
Surviving Spouse Remarries in Same Year
If the decent was married at the time of death, the executor of their estate has two filing options for the decedent:
– Joint return with the surviving spouse
– Married taxpayer filing a separate return
If the surviving spouse remarries before the end of the tax year, they must file the decedent’s return as married separate. The surviving spouse may choose to file jointly with the new spouse or married separate.
The Decedent’s Final Tax Return
The same filing requirements apply to a deceased taxpayer as would otherwise be used if the taxpayer were still living, based on income level, age, and filing status, but a fiduciary return may also be required.
Refunds: If a decedent’s return claims a refund, Form 1310 must be filed unless the person claiming the refund:
– Is the surviving spouse of the decedent
– Is filing a joint return with the decedent
– Is a court-appointed or certified personal representative and is filing an original return for the decedent
Income to Include: Include income up to the date of death.
Exemptions and Deductions: All rules regarding exemptions and deductions apply to the final return.
Medical Expenses: Medical expenses paid prior to death may be claimed as itemized deductions by the decedent. Medical expenses paid out of estate funds within one year after death can be treated as if paid by the decedent and may be claimed on the decedent’s final return. Any medical expenses which do not meet this requirement become liabilities of the estate and must be claimed on the estate tax return.
Net Operating Loss (NOL) Carryovers: An NOL carryover of the decedent can only be deducted on his/her final return. If the final return results in an NOL, it may be carried back to the decedent’s prior year returns as usual.
Passive Losses: When a passive interest is transferred due to death, the accumulated suspended losses are deductible on the decedent’s final return. The amount will be limited to funds in excess of the basis of the property at date of death over the decedent’s adjusted basis in the property just before death.
Other Tax Attributes: To the extent that the following carryovers are attributable to the taxpayer, their balance is lost.
– Business Tax Credit Carryover
– Capital Loss Carryover
– Charitable Contribution Carryover
– Investment Interest Carryover
– Minimum Tax Credit Carryover
Carryovers of foreign tax credit, domestic production deduction, and unrecovered basis in the decedent’s pension are subject to special rules.
Return Signature: The word “DECEASED,” the decedent’s name, and the date of death must be written at the top of page one of Form 1040. The personal representative and/or surviving spouse (if there is one), must sign the return. If the return is joint, the surviving spouse must also sign. If the decedent had no representative or was unmarried, the person in charge of the decedent’s property should sign as “personal representative.”
Was the Decedent Receiving Social Security Benefits?
If so, a family member or other person responsible for the beneficiary’s affairs must:
– Promptly notify Social Security of the beneficiary’s death by calling Social Security Administration toll-free at 1-800-772-1213.
– Notify the bank or other financial institution of the beneficiary’s death if monthly benefits were being paid via direct deposit and request that any funds received for the month of death and later be returned to Social Security. Benefits paid by check should not be cashed and must be returned to Social Security as soon as possible.
– Pay a lump sum to the surviving spouse if he or she was living with the beneficiary at the time of death or, if living apart, was receiving Social Security benefits on the beneficiary’s earnings record. The payment may be made to a child who was eligible for benefits on the beneficiary’s earnings record in the month of death if there is no surviving spouse.