When a loved one passes away, the responsibility of managing their financial affairs often falls on the executor or a surviving family member. Whether your loved one passed in Georgia or another state, there are important procedures to follow to wind up that person’s affairs. Among the many tasks is filing the deceased person’s taxes. This guide provides a detailed, step-by-step explanation to help you navigate this complex duty with clarity and confidence.

Step 1: File the Final Tax Return

The first and most important step is filing the deceased person’s final individual income tax return. This ensures that all income earned up to the date of death is reported and any applicable taxes are paid.

1. Gather Documentation: Before you begin, collect all necessary documents, including W-2s, 1099s, investment records, and bank statements. These will help you identify all income sources and deductions.
2. Choose the Correct Form: Use IRS Form 1040 or 1040-SR (for seniors). On the top of the form, write "Deceased" next to the individual’s name and include the date of death.
3. Report All Income: Include wages, interest, dividends, and other earnings from January 1 to the date of death. If there is missing documentation, a CPA can help request account transcripts from the IRS.
4. Who Files the Return: The executor or personal representative is typically responsible for filing and signing the return. If no executor is appointed, a surviving spouse or next of kin may file.
5. Filing Deadline: The final tax return is due on the standard tax filing date, typically April 15 of the following year. If more time is needed, file Form 4868 to request an extension.

Step 2: Determine the Filing Status

Selecting the correct filing status for the deceased’s final tax return is critical. Here’s what you need to know:

1. Married Filing Jointly: If the deceased was married and their spouse has not remarried within the year of death, the couple can file a joint return. This status typically results in the lowest tax liability because it allows for higher standard deductions and lower tax rates.
2. Qualifying Widow(er): A surviving spouse with a dependent child may qualify for this status for up to two years after the year of death. It offers the same tax benefits as filing jointly, providing financial relief during a challenging time.
3. Single or Head of Household: If the deceased was unmarried, their filing status would depend on whether they had dependents or met other criteria for Head of Household status.

Step 3: Understand When an Estate Must File Its Own Tax Return

After a person’s death, their estate may generate income, such as from rental properties, dividends, or interest. If the estate earns $600 or more in gross income, it must file its own tax return.

1. Form 1041: This is the tax return used to report estate income. To file, the estate needs an Employer Identification Number (EIN), which can be obtained from the IRS.
2. Tax Year Options: Executors can choose between a calendar year (January 1 to December 31) or a fiscal year (any 12-month period ending in a month other than December). Opt for the calendar year if it simplifies accounting with year-end statements, or a fiscal year to defer taxes.
3. Why File an Estate Return: Filing separates the estate’s financial obligations from the beneficiaries’, ensuring taxes are paid before assets are distributed. This helps avoid penalties or liability issues for the executor.

Recommendation: Consult both an estate planning attorney and an accountant to ensure the estate return is filed accurately. These professionals can work together to identify the best approach for minimizing taxes and meeting deadlines.

Step 4: Claim Deductions and Credits

The deceased person’s final return should include all eligible deductions and credits. These can reduce taxable income and minimize the estate’s tax burden.

1. Medical Expenses: Medical bills paid within a year of death can be deducted if they were not reimbursed by insurance. Executors may choose to deduct these on the final return or the estate’s return, depending on which offers the greater benefit.
2. Standard Deduction and Itemized Deductions: The deduction depends on the filing status. Executors should review whether itemizing (e.g., deducting mortgage interest or charitable contributions) results in greater tax savings than the standard deduction.
3. Tax Credits: Any credits the deceased qualified for before their death, such as the Earned Income Tax Credit or Child Tax Credit, can still be applied to the final return.

Recommendation: Work with a CPA who understands estate taxation to ensure all eligible deductions and credits are claimed. This can significantly reduce the estate’s overall tax burden.

Step 5: Handle Inherited Assets

Beneficiaries do not pay taxes on inherited assets, but they must pay taxes on any income those assets generate.

1. Rental Properties and Investments: Rental income from inherited properties or dividends from inherited investments are taxable and must be reported by the beneficiary.
2. Capital Gains Tax and Stepped-Up Basis: When inherited assets are sold, taxes are owed on the gains calculated using the stepped-up basis, which adjusts the asset’s value to its fair market value at the date of death. This often significantly reduces taxable gains.

Recommendation: Beneficiaries should consult with an estate attorney and an accountant to understand their obligations and how to manage inherited assets effectively.

Step 6: Address Income in Respect of a Decedent (IRD)

Income in Respect of a Decedent refers to income earned but not received before death. Common examples include:

• Unpaid wages
• Retirement account distributions
• Bonuses

1. Who Pays Taxes on IRD: IRD is taxable to the recipient—either the estate or the beneficiary. For example, distributions from inherited retirement accounts are generally taxable to the beneficiary as ordinary income.
2. Claiming Deductions Against IRD: If estate taxes were paid on IRD, the recipient can claim a deduction for those taxes to avoid double taxation.

Recommendation: Collaborate with a CPA to ensure IRD is accurately reported and any deductions are applied to reduce tax liability.

Step 7: File Estate Tax Returns if Necessary

Federal estate taxes apply only if the estate’s value exceeds $13.61 million (as of 2024). Executors must:

1. File Form 706: This is required to calculate and pay any federal estate taxes. Obtain accurate valuations for assets like real estate, businesses, and investments.
2. Address State Estate Taxes: Some states impose estate or inheritance taxes with lower exemption thresholds. Review state-specific laws to determine filing requirements.
3. Timely Filing: Estate tax returns are typically due nine months after the date of death. Extensions may be requested if additional time is needed to value assets.

Recommendation: An estate planning attorney and an accountant can collaborate to ensure all tax laws are followed and that filing requirements are met on time. They can also help explore strategies to minimize tax liabilities.

Step 8: Avoid Penalties and Seek Professional Guidance

Navigating the tax implications of a loved one’s death can be overwhelming. To avoid penalties and ensure compliance:

1. Hire Professionals: Tax professionals and estate attorneys can provide invaluable guidance, ensuring all returns are filed accurately and on time.
2. Stay Organized: Keep meticulous records of income, expenses, and valuations. This not only simplifies tax filing but also provides transparency to beneficiaries.
3. Request Extensions: If you’re unable to meet a deadline, file for an extension to avoid penalties while ensuring accurate reporting.

Recommendation: Schedule a consultation with our firm. Our team of experienced estate planning attorneys and accountants works together to provide comprehensive guidance tailored to your specific situation.

Conclusion

Filing taxes for a deceased person is a multifaceted process that requires careful attention to detail. By following this comprehensive guide and seeking professional advice when needed, you can manage this responsibility effectively. If you have questions or need personalized assistance, contact our Atlanta, Georgia estate planning firm, Slowik Estate Planning, to ensure everything is handled correctly during this challenging time.