Death of a Taxpayer
After the death of an individual taxpayer, the taxpayer's final individual tax return must be filed. The estate administrator often needs to file an income tax return for the taxpayer's estate as well, and may need to file an estate tax return.
Final Individual Income Tax Return
All of a deceased taxpayer's income, credits, and deductions for the last tax year of the taxpayer's life up to the date of death should be reported on a 1040 series return. The return is completed, and any tax due paid, just as if the taxpayer were living, except that the period covered by the return is likely to be shorter than a year.
The person handling the deceased taxpayer's affairs can claim a tax refund, if one is due, on IRS Form 1310.
Estate Income Tax Return and Estate Tax Return
A probate estate may need to be opened for the deceased taxpayer. If an estate is required, the probate court with jurisdiction will appoint an estate administrator, often called a personal representative or executor or executrix.
The estate administrator has authority to handle the deceased taxpayer's tax matters. In addition to filing the taxpayer's final individual return, as discussed above, the administrator needs to file a return (Form 1041) for the estate itself if the estate assets (such as savings accounts, CDs, stock, bonds, mutual funds, and rental property) generate more than $600 in annual income.
The income, credits, and deductions of an estate are calculated in much the same way as they are for a living individual taxpayer. The estate, however, takes a deduction for income distributed to the estate's beneficiaries. The return preparer must report income distributions to the beneficiaries and the IRS on Schedules K-1 (Form 1041).
Form 1041 for a calendar year estate is due on April 15 of the following year (the 15th day of the fourth month after the tax year for a fiscal year estate). The estate pays quarterly estimated income tax in the same way as individuals do.
To file a Form 1041, the administrator must obtain an employer identification number (EIN) for the estate. If a business is part of the probate estate, the administrator also needs to obtain a new EIN for the business and pay any income tax that the business itself owes.
Depending on the size of the deceased taxpayer's "gross estate" (a separate concept from the probate estate), the estate administrator may need to file an estate tax return (Form 706). For 2016, an estate tax return is due if the deceased taxpayer's gross estate plus prior taxable gifts total more than $5,450,000.
The estate tax return is not an income tax return. Estate tax is imposed on everything the deceased person owned at death (the gross estate), less deductions (such as mortgages, debts, and property passing to a surviving spouse). The value of lifetime gifts is added. The tax on the resulting amount is reduced by the "available unified credit."