Office Notes: Filing Federal Income Taxes for the Deceased

Filing Federal Income Taxes for the Deceased

Follow these tips to keep an already stressful time from becoming more stressful

by Kimberly Lankford, AARP, February 16, 2021

Last Will and Testament rolled up with IRS 1040 tax return

Alamy Stock Photo

When a loved one passes away, someone has to file a final tax return for them. If that someone is you, here's what you need to know.

When to file

If a loved one died in 2020, you need to determine who will file their final income tax return. “A final return must be filed if required, either by the spouse or executor, which notes the date of death,” says Michael Eisenberg, a CPA with Baker Tilly Financial, LLC in Encino, California.

Use the same IRS Form 1040 as you would for living taxpayers, but note the date of death on the top. If there's no surviving spouse, then the trustee, executor or administrator must file Form 56 letting the IRS know that they're the person responsible for the final tax return. “All income up to the date of death has to be reported, and all credits and deductions to which they are entitled can still be claimed,” says Steven Hamilton, an enrolled agent with Hamilton Tax and Accounting in Grayslake, Illinois.

Surviving spouses can file a joint return in the year of death, no matter when during the year their spouse died. The return can use the married filing jointly status. (However, if the surviving spouse remarries before the year of death is over, then the deceased taxpayer's return must use the married filing separately status).

Checklist — IRS forms and information needed to file for deceased

  • W-2s, 1099s and other tax forms for the year of death, reporting income or expenses paid before the person died.
  • IRS Form 1040 to file for the year of death.
  • Death certificate: “Some states require it to be sent with the return and in certain circumstances it may be needed for the federal return as well,” says CPA Bret Scholl.
  • Form 56: If you are a trustee, executor, administrator or other person responsible for the person's estate, you must file Form 56 to let the IRS know that you are the person responsible, says Scholl.
  • Form 1310, “Statement of Person Claiming Refund Due a Deceased Taxpayer” will need to be filed if a refund is due from the last tax return. “This is necessary for the IRS to pay the refund to the decedent's estate or trust,” says Scholl.
  • Form 1041, “U.S. Income Tax Return for Estates and Trusts” reporting more than $600 in annual gross income (such as dividends, interest, proceeds from the sale of assets) received after the person died.
  • IRS Publication 559, “Survivors, Executors and Administrators” Scholl recommends reading this for more information about the requirements. It's also a good time to get professional help from an attorney, CPA or other expert, especially for complicated or large estates. “As a trustee, executor or administrator, if something goes wrong it is possible you could have some personal exposure for financial risk, so this is usually not a great DIY project,” he says.

The deadline for the final federal tax return is the same, April 15, 2021, for 2020 income. If you can't gather the paperwork in time, you can file for an extension to October 15, 2021. But this extension only changes the filing deadline; any money that is owed to the IRS is still due by April 15.

"Just as when living, filing for an extension allows for time to get the return prepared and filed, but any taxes due must still be paid by April 15,” says Bret Scholl, a CPA with Scholl & Company LLP in Corral de Tierra, California. “As you might imagine, that could be a real challenge for an executor to determine in time for April 15. They should do the best they can to estimate what is due and pay that. Then, upon filing the return, they will settle up for any difference due or to be refunded back to the estate.” If a refund is due, the executor can file Form 1310, “Statement of Person Claiming Refund Due a Deceased Taxpayer” for the IRS to pay the refund to the deceased person's estate or trust. (A surviving spouse is not required to file Form 1310.)

"The final income tax return of an individual should only cover income received up to the date of death,” says Mary Kay Foss, a CPA in Walnut Creek, California. Income received after that, such as from assets sold after the date of death, may have to be reported on a separate return for the deceased person's estate or trust (Form 1041).

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Other considerations

The surviving spouse or executor may also need to make some other decisions soon after the person dies:

Take the last RMD. If the person who died had been taking required minimum distributions from their IRA or other retirement-savings plan, be sure to take the full RMD for the year they die. The payout options depend on the type of beneficiary. A surviving spouse can roll the IRA into their own account and delay taking RMDs until they turn age 72. Or they can transfer it to an inherited IRA and withdraw money penalty-free before age 59 1/2, but they'll have to start taking RMDs the year after the original owner dies or the year the original owner would have turned 72. Non-spouse beneficiaries must generally withdraw all the money within 10 years.

Decide what to do about delayed medical expenses. It isn't unusual to receive some medical bills for a last illness after the person dies. “If uninsured medical expenses were incurred but not paid before death, the surviving spouse or executor must make a potentially important choice about how those expenses are treated for federal tax purposes,” says Scholl. The executor can choose to include medical expenses that were paid both before and after the date of death on the final Form 1040, and can deduct expenses that are more than 7.5 percent of the deceased taxpayer's adjusted gross income if itemizing. “To take advantage of this special itemized deduction privilege for unpaid medical expenses, they must pay the expenses out of the decedent's estate during the one-year period beginning with the day after the date of death,” says Scholl.

The tax-related requirements can be complicated and stressful after a loved one dies. “I think the biggest mistake a grieving spouse can make is not to immediately call their CPA and/or attorney and immediately start gathering the information needed to file tax returns and notify payers such as Social Security that the individual died,” says Melody Thornton, a CPA with Fitzgerald & Company LLP in San Diego. “If they can't do it themselves, get a trusted family member or friend to help with the logistics."