When person dies there are many tasks to complete. One of the most important and confusing areas for the beneficiaries is taxes. Below is a summary of some taxes that may be applicable when a person dies.
Personal: Generally, when someone passes away, the final individual federal and state income tax return must be prepared and filed in the same way as when they were alive, says nj.com, in the recent article, “What tax returns need to be filed after someone dies?” All of the income starting at the beginning of the year up to the individual’s date of death, must be reported on the tax return. All of the tax deductions and tax credits that the person was entitled to may be claimed. This final return is typically filed by the surviving spouse or by the executor of the individual’s estate. The final return can be either electronically filed or filed on paper. The tax preparer should also be sure to write “deceased” after the taxpayer’s name and include the date of death, so that the IRS knows that this will be the last individual return filed.
Estate/Trust: At the death of a taxpayer, a new taxpaying entity—the taxpayer’s estate—is automatically created to make certain that no taxable income escapes review by the IRS. Income that’s earned during the tax year, up to the date of the person’s death, is reported on the final individual tax return, and any earnings after that date are taxable to the decedent’s estate. Earned income of the estate/trust is any income for which the decedent was entitled to during the year that occurred after the date of death. This could include any dividends or interest from stock or bond investments held in the decedent’s name that was collected between the date of death and the end of the calendar year before the income was distributed to the beneficiaries.
Beneficiary Income Tax: In addition, beneficiaries of assets paid directly to them outside of probate, like IRAs already in distribution mode or life insurance policies, may be subject to what is called “income in respect of a decedent,” or IRD. Two things must apply for this to occur: (i) the asset earns interest before the balance is transferred or paid to the beneficiaries; and (ii) the interest isn’t reported on the deceased taxpayer’s final tax return. If both of these occur, then beneficiaries are responsible for reporting IRD on their own tax returns. Also, income earned after the decedent died that was distributed to a beneficiary will be reported on the beneficiary's personal income tax return.
The deceased father’s estate may then also need to file returns, so talk to an estate planning attorney to be certain that everything is correct. In 2019, a person can die and pass $11,400,000 estate tax free. If the decedent's estate is less then this amount, minus lifetime gifts, then no estate tax return should be due. At this time there is no estate due for in California if the decedent was a resident of California at his/her date of death. If the decedent owned asset in another state, such as land, then there may be estate tax due in that state. Every state has individual thresholds for the own estate tax.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: nj.com (March 21, 2018) “What tax returns need to be filed after someone dies?”