Tax Filing After Loss of a Loved One

Written By: Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®

Losing someone close to us is one of the most challenging times we face. If you are one of the people charged with helping sort out the deceased person’s affairs, it can be a time of added stress. One of the most important duties is to help file the deceased person’s final tax returns. Let’s examine some of the key factors to consider when filing taxes after someone passes away.

Is a Tax Return Required?

When a person passes away, the executor (estate administrator) will typically file two returns for the year of death: the decedent’s personal income tax return and an income tax return for the estate.

The personal income tax return (Form 1040) reports income earned by the decedent when they were alive.

The estate return (Form 1041) includes any income attributable to the decedent from the date of death until the estate is closed. Estate income could include interest, dividends, capital gains or losses, rental income, etc. The estate is also entitled to various deductions, including: a $600 standard deduction, distribution to beneficiaries, fees paid to the executor, estate attorney, accountants and other experts, and estate administration expenses.

The 2022 filing requirements for the most common filing statuses for a personal return are below:

 

If your filing status is:	AND at the end of 2022 you were:	Then file a return if your gross income was at least
Single	Under 65	$12,950
	Over 65	$14,700
Married Filing Jointly	Under 65 (both spouses)	$25,900
	65 or older (one spouse)	$27,300
	65 or older (both spouses)	$28,700

 

If your income is below the stated thresholds, a return is typically not required. If a return is not required, you should still file one on the deceased person’s behalf if a refund is expected. A refund could be due if tax was withheld from the deceased person’s salary, pension or Social Security, or if they were making quarterly tax payments.

The estate must file an income tax return if it generates more than $600 in gross income.

An estate tax return (Form 706) is rarely required with the estate exemption currently over $12 million per person. If your gross estate is above $12.06 million or an election to transfer the deceases spouse’s unused exclusion (DSUE) to the survivor needs to be made, then an estate tax return should be filed.

Forms for Beneficiaries

If distributions are made from the estate, the beneficiaries are responsible for paying income tax on amounts received. The estate must issue a Schedule K-1 to each beneficiary.

Paying the Tax

The executor is responsible for making sure that the estate pays any income taxes that are due. The tax liability is paid from estate assets.

Tax Planning for the Surviving Spouse

If it is your spouse that has passed away, there are various tax filing and planning strategies that the surviving spouse needs to be aware of.

In the year of death, you can still file a return as married filing jointly with your deceased spouse, unless you remarry during that year.

If you remarry in the year of your spouse’s death, you will not be able to file jointly with your deceased spouse, but you can with your new spouse. You and your new spouse can also each use married filing separately. If a return with your deceased spouse needs to be filed, use the married filing separately status.

Some surviving spouses can use the qualifying widow(er) status for the two tax years after the death of their spouse. However, it cannot be used in the year of death. To qualify for this status, the following requirements must be met:

• You qualified for married filing jointly with your spouse in the year they passed away.
• You did not remarry before the close of the tax year.
• You have a child, stepchild or adopted child you claim as a dependent.
• You paid more than half the cost of maintaining your home and it must be the main home of your dependent child for the entire year.

If you do not meet the requirements for qualifying widow(er) status, then you will file as single in the year after your spouse passed away.

Once you start filing as single, your tax brackets are much narrower, which could result in you being in a higher tax bracket going forward. You may want to consider realizing additional income in the year your spouse passes away to take advantage of the wider tax brackets. Consider things like Roth IRA conversions, realizing capital gains at 0% (if possible), or taking additional distributions from retirement accounts. If you are itemizing deductions, you may want to consider delaying deductions into the next tax year by delaying property tax payments, charitable gifts, the year’s last mortgage payment, etc.

State Returns

Each state has their own unique rules regarding income, estate or inheritance tax filing requirements. It is important to review the filing requirements where the deceased lived, along with any state where they may have owned real estate, business assets or other property to determine if returns are required to be filed or if any tax is owed.

Working with your financial advisor and tax professional is the best way to navigate the complexities of any potential tax filings resulting from the death of a loved one. Your Shakespeare financial advisor is always here to help you! Please don’t hesitate to reach out if we can be of assistance.