One death can lead to multiple tax returns, and failure to pay could risk losing title to the deceased’s property.
It may be time to mourn a loved one’s death. But after the funeral is over, the tax man waits.
Here is a quick checklist of what not to forget, to avoid penalties and even a real estate auction for unpaid taxes.
But first, the person handling the estate should seek precise counsel from a local licensed tax preparer. Also call the attorney, if the deceased had one, to certify the will or trust. You will need a death certificate from the local county of jurisdiction to do so.
Also, check tax deadlines for property related taxes due to the deceased’s county. Do not overlook paying these and ask what grace period is permitted in the event of pending estate settlements. Failure to pay can lead to a tax lien on the property and a county auction for a tax bill, for far less value than the property may be worth.
A common point of confusion is whether property taxes due the county can be prorated up until the date of the owner’s death. While real estate property taxes are frequently prorated between buyers and sellers during a home sale, the IRS does not allow proration for a final individual tax return. It is strictly an all-or-nothing rule dependent on the payment date from the decedent’s account. If the payment left the account after the date of death, the payment cannot be deductible on an individual tax return. The tax payment may become deductible on the estate return only.
Brief thumbnail of tax filings due:
Final individual return – IRS Form 1040 – A surviving spouse can file it jointly.
Estate income tax return – The estate gets its on EIN tax filing number if there is income exceeding $600. The filing uses IRS Form 1041.
Trust income tax return – A revocable trust may become irrevocable upon the death of one of the grantors and requires its own filing, form 1041 for trusts.
Federal estate tax return – required if the estate exceeds $15 million. This would require use of IRS Form 706.
State estate or inheritance tax return- May be required by the local state with a lower threshold than the federal trigger of $15 million. In the event of an inheritance tax, it is levied on the value of the assets received by an heir from an estate. These rules currently apply in 12 states and the District of Columbia. Five states levy inheritance taxes. For a current list see taxfoundation.org.
Deadlines vary for each of these forms, and missed filings can lead to tax penalties and consequences. Additionally, it is worth noting that if the deceased was already taking distributions from an IRA or 401K account, the person handling the estate may need to handle the withdrawal before making the income tax filing. If there a beneficiaries for the account, then the beneficiaries may be on the hook to pay tax on the amount to be taken under a required minimum distribution schedule. Younger spouses may have the option to avoid the RMD by transferring the balance into their own IRA account.
The rules for tax filings and required withdrawal amounts can be complex, and tax rates change with the amount of the reported income and applicable deductions and exemptions. Anyone handling an estate knows it is better to figure in all of the final costs of settlement – including taxes – before beginning payouts of the balance. Otherwise, the person preparing the filings may find that he or she may end up paying the tax bill for the deceased.
