Are you responsible for arranging the final disposition of money of a loved one who has recently passed away? At this difficult time, it's hard to navigate the complexities of a decedent's income and who claims what. You likely also have to file final income taxes as well as an estate tax return. All this is, unfortunately, piled on top of dealing with the loss itself.
One way to help make it easier and less distressing is to understand what you'll need to do with your loved one's final income. Here's a short guide to the basic IRS terms you need to know.
The Final Form 1040
If the person who passed away earned income of any kind — including wages or salary, interest, dividends, Social Security payments, or pension income — their spouse or another designated person will likely need to file a final Form 1040. This form includes all income received prior to a person's death.
This final income tax filing is generally due when it would normally be due, but you can also request an extension of time if you need to gather more income documents. If the person was married, their spouse would file and may usually use the full deductions and credits due the couple.
Income in Respect of a Decedent
What happens if your loved one has income still due to them at the time of their passing? Then the beneficiaries generally must include this as Income in Respect of a Decedent (IRD). IRD includes things like wages or vacation pay not paid out until after the passing, accrued interest and dividends, property sales with uncollected payments, and deferred compensation plans through their employer.
IRD is usually taxed as it would have been if the person were still alive to receive it. But it would be included on the tax forms of the beneficiaries who received the assets or money.
The Estate Tax Return
The value of assets and cash (minus liabilities) makes up each deceased person's estate. If the estate is large enough, the executor may need to file the estate tax return (Form 706) to calculate any income taxes due. Even if you have to file this form, though, each taxpayer is allowed a significant lifetime credit that makes it even less likely that most estates will owe taxes. If the estate assets generate more than $600 in income after the passing, report this income on Form 1041 as well.
Estate taxes are more complicated than the average taxpayer understands, so you should work with a professional CPA service as soon as possible. Don't try to go it alone at this emotional time. Not only can a qualified accountant navigate the forms needed, but they can also help you and other beneficiaries avoid complications and unnecessary taxes.