Preparing a tax return for a deceased friend or relative can be mentally and emotionally challenging.
Filing taxes is often tedious and unpleasant.
Unless you work for the IRS or make money helping others prepare their tax returns, you likely despise this time of year.
Although it is challenging enough to complete your own taxes, it can be exponentially more frustrating to file a tax return for a deceased loved one.
According to a recent AARP article titled “How to File a Tax Return for a Deceased Taxpayer,” many people do not know where to begin when preparing a 1040 federal income tax form for a decedent.
Perhaps you are in this situation and are in need of some guidance.
The AARP article provides information on how to avoid common pitfalls.
What guidance is provided on filing tax returns?
Check the marital filing status.
If the person who died was married, the couple most likely has been filing a joint tax return,
The surviving spouse is left wondering how to file the return in the year the spouse passed away.
For this year, the surviving spouse should file a joint return.
In the area where the tax return is signed, the surviving spouse should write “filing as surviving spouse.”
The surviving spouse can continue to do this for the next two years, if the surviving spouse does not remarry AND has dependents.
What does this do?
It provides the surviving spouse benefits associated with a joint tax return.
One such benefit is the higher standard deduction.
Get authorization to file.
What does one do if there is no surviving spouse to file the tax return?
Someone must be selected to do so.
If the decedent created a last will and testament, this individual is likely the executor.
Without a last will and testament, the individual responsible would be the estate administrator or the person responsible for managing the property of the decedent.
Unless you have the financial records of the decedent, you will not have the required information for preparing the tax return.
To secure access to these records, you will need to present a certified copy of the death certificate to each of the financial institutions.
Locate the return from the previous year.
This is the best place to begin.
If the taxes were filed electronically, you will need to have the login information for the software program.
If the decedent provided passwords and instructions to a trusted individual, this will be relatively simply to access.
Without these, you may be unable to see the tax return from the previous year.
What can you do in this situation?
You can submit Form-4506-T to the IRS.
Doing so allows you to request a transcript of the tax return from the previous year.
The transcript will include information like taxable income, filing status, and tax payments.
You can also request the IRS to send a 1099-INT from a bank, a 1099-R from a union pensions distribution, or a W-2 to help you know what documents you will need to gather.
Update the address on the return.
If you are a surviving spouse and have moved or if you are an individual who did not live with the decedent, you will need to update the address.
Simply include your address as an “in care of” address.
Doing so ensures the documents from the IRS will come directly to you.
Review medical costs.
Did the decedent have medical expenses?
If yes, the decedent may be eligible for a deduction.
The deduction for medical expenses can be applied if the costs exceed 7.5 percent of the adjusted gross income for the decedent.
Medical costs can quickly reach this amount if the decedent was chronically ill, took prescriptions, stayed in the hospital for an extended period, or required long-term care.
Get extra time to file and make payments.
Gathering the appropriate documents can be daunting and challenging when dealing with funeral arrangements and estate administration duties.
It can be further complicated if the person who died was disorganized.
It is possible for the surviving spouse or executor to request an extension for the return.
If you miss filing because of funeral arrangements or another reasonable cause, the IRS may grant a break on late penalties.
Cut down the time for the IRS to assess taxes.
The IRS can have up to three years to determine whether you paid the correct amount for the tax year after the death your loved one.
To reduce this time to 18 months, you can file Form 4810.
What does this do?
It is a formal request for a prompt tax assessment.
Why is this helpful?
When filing the tax return for a decedent, it is possible to miss a 1099 or other documentation.
As a result, you would understate the income unintentionally.
By not filing Form 4810, the IRS could request taxes owed up to three years after the filing of the tax return.
It is likely the distributions would have already been made from the estate and money would have to be found to pay these debts.
And you do not want to be stuck ponying up to the IRS for the deficiency, do you?
You may be filing multiple returns.
Timing makes a significant difference.
If someone dies in January or February, you may find yourself with the responsibility of filing tax returns for two years.
Another instance where you may be required to file two tax returns is if the health of the decedent made it impossible for them to file a return for the previous year.
In this latter case, the IRS would send a notification that it has not received the tax return for the decedent.
These situations further underscore the need for filing a Form 4810.
If the estate had earned more than $600, you may also need to file a Form 1041 return for the estate.
Depending on how long it takes to settle the estate, you may need to file a Form 1041 for the following year as well.
It is possible certain estate account could continue to generate more than $600 each year.
Estate taxes are possible.
Form 706 covers estate tax returns.
At this time, the form must be filed if the estate of decedent exceeded $11.7 million in 2021 or $12.06 million in 2022.
Also, it may be very prudent to file the Form 706 for purposes of using (and not losing) the DSUE of the decedent (aka the “portability” method) to maximize estate tax savings.
Consider hiring an attorney.
Dealing with the aftermath of the death of a loved one is often overwhelming.
Yes, this tax compliance has a lot of moving parts and can be complicated.
It is normal to ask for help.
You could hire an experienced attorney or tax professional to assist you with these responsibilities.
Filing the tax return for a decedent is a significant task, but it demonstrates care for your deceased loved one and those they left behind.
Reference: AARP (Jan. 27, 2022) “How to File a Tax Return for a Deceased Taxpayer”