Filing Taxes for the Deceased [Step by Step]

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Paul Sundin, CPA

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There are two things for certain – death and taxes and they often go hand-in-hand. When a loved one dies, not only must you distribute their estate according to their final wishes, but you must also take care of their liabilities, which includes taxes.

Filing tax returns for the deceased is a requirement and there are certain steps you must follow to ensure they’re done right. Taxes aren’t always due on an estate, but if it’s worth enough or the estate earns income after the passing, taxes will be due.

Knowing how to file taxes for the deceased and when to pay them is important. Here’s everything you must know.

You Must Pay Taxes

Just like when you’re alive, you owe taxes on all earned income – the same is true of when you die. All income made up until the date the person dies must be reported to the IRS and taxes paid. It’s up to the executor of the estate or spouse to report the income.

If the deceased didn’t file tax returns for previous years, it’s up to the executor of the estate to file taxes for those years as well. This can all be done filing a 1040, just like you would for someone who is still alive. There is a spot on the form to mark that the person died during the tax year so the IRS knows it’s the final tax return.

If you aren’t sure if the taxes are up-to-date, consult with the IRS to ensure you are getting your loved one up-to-date.

When to File Tax Returns for the Deceased

You must file the tax returns for the deceased in the tax year that corresponds to their death. For example, someone who died in 2020 should have an executor or spouse completing his/her tax returns by April 2021.

Spouses who file jointly, can still file married filing jointly for the year their spouse died, but then must change their tax status the following year.

If you file paper returns (not using online software), you must write the word ‘deceased’ across the top of the tax return and include the date the taxpayer died. The person responsible for filing the taxes – usually the spouse or executor must then sign the tax returns on behalf of the deceased.

Understanding Estate Taxes

Estate taxes differ from income taxes. You pay income taxes on earned income – whether from a job, retirement account, or investments.

A person’s estate, however, may also incur taxes. It depends on its value. Each year the IRS sets an estate value exemption. If the estate is worth less than the limit, estate taxes aren’t due, but if it’s worth more, the estate owes taxes and the executor or spouse is responsible for paying them. In 2021, the limit is $11.7 million.

If the estate owes taxes, the executor or spouse must complete IRS Form 706 within 9 months of the death. If that’s no possible or there are extenuating circumstances, you can file for a 6-month extension.

If the estate earns any money within 12 months of death and it exceeds $600, the executor must file Form 1041 to report the earnings. This form should be filed by April 15th following the day the person died.

Other Forms Needed to File Taxes for the Deceased

To file taxes for the deceased, you’ll need the following forms:

  • Any forms proving income earned including W-2s and 1099s
  • Death certificate
  • IRS Form 56 to prove you are the executor of the estate
  • IRS Form 1310 if the deceased will receive a refund, this gives you permission to receive the refund
  • IRS Form 1040 to report any income earned
  • IRS Form 1041 to report any estate income

Dealing with Medical Expenses

Most people have unpaid medical expenses after their death. How you handle those expenses can affect your taxes. It’s important to make decisions before the death to decide how you’ll handle medical expenses.

Here’s what to consider:

You can include all medical expenses before and after death on the tax return. Any expenses that exceed 7.5% of the gross income become deductible. If you choose this option, though, you must pay the medical expenses from the deceased’s estate before distributing funds to any beneficiaries.

Dealing with Retirement Accounts

If your loved one had retirement accounts with Required Minimum Distributions (non Roth accounts), you must act fast to take care of them and not face serious tax penalties.

First, take the full amount of RMDs for the year they died. You have a couple of options on how to take them:

  • Surviving spouses can roll the entire amount into their IRA and avoid taking RMDs unless they are 72-years old
  • Transfer the money to an inherited IRA. The beneficiaries can withdraw funds penalty free until age 59 ½. RMDs start the year after the owner died and all funds must be withdrawn within 10 years.

Get Professional Help Filing Taxes for the Deceased

Filing the final taxes for the deceased must be detailed and correct. Missing even one form or piece of income can result in penalties and interest that you could have avoided. Dealing with the death of a loved one is hard enough, but then handling the taxes and laws that govern the finances can get tricky. Get the help you need to ensure you follow all tax laws and understand how to minimize the tax liability for your deceased’s estate.

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Gilbert, AZ