Tax Return For A Deceased Taxpayer

What are the income tax consequences if Grandpa dies on June 30, 2014?  If a taxpayer dies during the tax year, the IRS still expects a tax return to be filed on behalf of the Decedent tax returndecedent.  In general, it is the executor’s responsibility to ensure the final tax return is prepared and filed.

When preparing the final return, write the word “Deceased” and the date of death across the top of the tax return.  If the return reflects a refund due the decedent, a Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, may be required to be filed.  This form is not required if the decedent was married on his date of death and is filing a joint return with his surviving spouse.

What to include?

The income earned by the decedent from January 1 until date of death should be reported on the decedent’s final Form 1040.  Income earned from the assets owned by the decedent after the date of death is reported on a Form 1041, U.S. Income Tax Return for Estates and Trusts.  To continue our example of Grandpa above, the income earned by Grandpa from January 1, 2014 through June 30, 2014 would be reported on his final Form 1040.  If Grandpa left behind rental real estate, stocks and bonds, the net rental income, dividends and interest earned after June 30, 2014 on those assets would be reported on a Form 1041.

Closing the estate

In general, an estate should not remain open longer than 2 years.  This gives enough time for the executor of the estate to distribute the decedent’s assets and get them re-titled in the beneficiary’s names.  Once an asset is distributed to the beneficiary, the estate no longer pays income tax on the income generated from the asset; it becomes the responsibility of the beneficiary.  A common misconception is that inheritances are taxable income.  The inheritance itself is not taxable; however, the income generated on the inherited assets is taxable income to the beneficiary.

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