Tax Tips & Calculators

Filing a decedent's final return is usually the responsibility of the executor or administrator of the estate. But if neither is named, a survivor must do it. The return is filed on the same form that would've been used if the taxpayer were still alive. Enter "Deceased," the deceased taxpayer's name and the date of death across the top of the return. Failure to enter this information may cause a delay in processing the return. The filing deadline is April 15 of the year following the year of the taxpayer's death.

A surviving spouse can file a joint return with his or her deceased spouse as long as the surviving spouse did not remarry before the end of the year. If the surviving spouse remarried before the end of the year, the filing status for the deceased spouse is Married Filing Separately.

Reporting Income

If the decedent used the cash method of reporting income, only income actually or constructively received before the date of death should be reported on the final return.

For example, the dividends from a money-market mutual fund earned through the date of death are reported on the decedent's final tax return. Dividends earned after the date of death are taxable to the beneficiary of the account or the estate and are reported by the beneficiary or estate.

If the decedent used the accrual method, include income accrued through the date of death even if it wasn't received. The accrual method is normally used only for business income.

Income in respect of a decedent is income the decedent had a right to receive at the time of death but that isn't properly included on the final return. The income is taxable to the estate or other person who receives it.

Consider these examples:

• Joe owned and operated an orchard. He sold $2,000 worth of fruit to a customer, but didn't receive payment before his death. That amount isn't reported on Joe's final return. When the estate was settled, the right to receive payment went to Joe's niece. When she collects the money, she'll report it as taxable income.
  
• Pam had a right to a bonus from her employer at the time she died. The bonus is not included on her final return. When the estate or beneficiary collects it, it will reported on the return of the estate or beneficiary.
  

Tax on Your Inheritance

The value of property you inherit is generally not subject to federal income tax. For example, if you inherit a $100,000 certificate of deposit, the $100,000 principal isn't taxed, but you must include in your income any interest earned after you become the owner.

But money in traditional IRAs and employer-provided retirement plans — including 401(k) plans — is treated as income in respect of a decedent and taxed to the heir. This rule also applies to earnings in inherited Roth IRAs if the decedent didn't meet the 5-year requirement.

If the decedent owned savings bonds and didn't report the interest annually, the interest accrued through the date of death can be reported on the decedent's final return. If this is not done, the person who inherits the bond reports all accrued interest from the time the decedent acquired the bond when that person redeems the bond. If interest accrued through the date of death is reported on the decedent's final return, the person who inherits bond is taxed only on the amount accrued after death.

Deductions

All deductible expenses (whether adjustments to income or itemized deductions) paid before death can be written off on the final return. Medical bills paid within 1 year after death can be deducted on the final return even if the bills weren't paid until after death.

Neither the standard deduction nor exemptions claimed on the decedent's final return are prorated according to the time the decedent was alive during the year. Both the full standard deduction and exemptions may be claimed.

Expenses for which the decedent was liable, but that hadn't been paid are deductible by the decedent's estate or by the decedent's beneficiary at the time the expenses are paid. For example, real estate tax on the decedent's home is deductible by the estate (if the property went into the estate) or by the person who inherited the home.

Refunds

If a refund is due, you may have to complete and file a copy of Form 1310 - Statement of Person Claiming Refund Due a Deceased Taxpayer with the final return. The form isn't required if you're a surviving spouse filing a joint return with the decedent or a court-appointed or certified personal representative filing for the decedent and you attach to the return a court certificate showing your appointment.