When grieving over the loss of a loved one, the last thing you want to think about is a deceased family member’s unpaid tax bill.
However, if you are the estate’s executor or helping that person through the process, you need to know what to expect. In today’s post, I’ll walk you through the tax responsibilities that remain after a loved one’s death.
What is an executor?
First, there are some terms you should know in this situation. For instance, “decedent” is the word used to refer to someone who has passed. Another important word to know is “executor.”
When a person dies, the family member or friend who is identified as being responsible for carrying out the will and/or completing the financial tasks that remain is often called the “executor” or “personal representative.” The IRS prefers the term “personal representative.”
Sometimes an executor is appointed in a will, sometimes this person is appointed by a probate court, and sometimes the role naturally falls to the widow(er) or heirs. An executor is responsible for three main tasks that should be completed in this order: identifying assets, paying off debts, and distributing any remaining assets to heirs and beneficiaries.
The executor must also file tax returns and pay any resulting tax bill. If a decedent’s estate cannot pay all debts, then federal and estate income taxes must be paid before other debts.
Which tax forms do I file for a deceased family member?
You will file a final Form 1040 for income taxes. If you will be signing the return, you should also complete and attach Form 56 to show your fiduciary relationship to the deceased person.
Additionally, if you aren’t the widow(er) and filing a joint return or if you haven’t been appointed executor by a court, you’ll also need to complete and attach Form 1310 if you will be claiming a refund.
You may also need to file a Form 1041 to report income earned by the estate after the death and prior to the estate closing.
How do I file a Form 1040 for a deceased family member or loved one?
The final Form 1040 filed for your loved one will cover taxes from January 1 through the death date. Taxes should be filed and tax bills are due by the standard deadline (usually April 15) unless you file for an extension.
The decedent’s income will be taxed the same as usual which means that the same deductions and credits will apply as well. When completing Form 1040, you’ll need to write the word “deceased” along with the person’s name and death date at the top.
How does a surviving spouse file a Form 1040?
The surviving spouse can still file a final joint Form 1040 for the tax year. This will allow the widow(er) to benefit from lower tax rates and special rules for joint filers. However, if the surviving spouse remarries on or before December 31, the spouse must file using married-filing-separate status.
In fact, if all of the following criteria are met, the surviving spouse can file a joint return for the two tax years following the spouse’s death:
- The widow(er) remained unmarried for the entirety of the current tax year,
- The widow(er) has a child, stepchild, or foster child who qualifies as a dependent for the current tax year,
- The widow(er) paid more than half the cost of maintaining a home that is the principal home for the dependent, and
- The surviving spouse must have been eligible to file a joint return in the year of the spouse’s death.
Do I need to file a federal income tax return for the estate?
If you are the executor and your deceased loved one had any assets that might generate over $600 of gross income within 12 months of the death, then you’ll need to file Form 1041 to pay federal taxes for the estate.
For example, if the decedent owned rental property, or if the decedent held investments, those assets could still be generating income. You’ll only need to file Form 1041 if all of the deceased person’s income-producing assets do not go straight to the surviving spouse or heirs.
Prior to filing a Form 1041, you’ll first need to apply for an employer identification number (EIN) because the estate cannot use a Social Security number. You can use December 31 as the tax year-end date, or you can use another month as long as the year doesn’t cover more than 12 months. Generally, executors choose to begin the tax year on the death date and end it on December 31 of that same tax year.
What taxes do I file if my loved one had a revocable trust?
Some people set up revocable trusts to hold their property, investments, and other assets. These are also called “living trusts,” “family trusts,” or “grantor trusts.”
When a married person passes away, the trust generally remains the same. However, when the second spouse dies or when a single person with a revocable trust dies, the trust becomes an irrevocable trust.
At this point, the money and assets in the trust are taxed at higher rates, so it’s important to disburse the money in the trust as soon as possible. Trusts will also use an EIN to file a Form 1041.
Am I responsible for paying medical expenses or other bills for a deceased family member?
Unless you are the widow(er) or you are an executor who didn’t follow your state’s probate laws when paying the estate’s bills, then you most likely are not financially responsible for any of your loved one’s unpaid bills, including medical bills. Instances where you might be responsible for paying the bill include:
- If you cosigned a loan with the decedent,
- If you held a joint account with the decedent, or
- If you share community property with the decedent in certain states.
In regards to income taxes, if you are the executor and staring at a pile of unpaid medical bills, you’ll likely want to choose to deduct as-yet-unpaid medical expenses on the decedent’s final Form 1040.
If you are responsible for the medical bills, be sure to track the total amount of out-of-pocket medical expenses. If your expenses exceed 7.5% of your adjusted gross income (AGI) for the tax year you may want to itemize your tax return.
Will I have to pay estate tax?
Probably not. In 2020, any estate worth less than $11.58 million won’t need to pay a federal estate tax, which is a type of wealth tax. If this does apply to you, then you’ll complete and file Form 706.
Will I have to pay state taxes?
Possibly. You will need to check with the decedent’s state department of revenue for specific directions.
Thankfully, most people do not find themselves in the situation of being an executor very often, so it’s okay to give yourself grace when figuring out what needs to be done next. If you’re confused or need assistance, make sure you contact a CPA or attorney who can help with all of the paperwork and decisions.