Taxes for the Deceased Still an Obligation
Taxes for the deceased fall into our laps at the worst possible time, when we’re dealing with grief and stress. But filing a final return for a loved one who has passed, or handling the return of an estate, is unavoidable. And, as the old saying goes, certain.
Taxes for the Deceased: The Final Income Tax Return
Someone must file a tax return for the deceased for the final year of their life (from January 1 to the date of death). This is a job that often falls to a surviving spouse. It could also be handled by an executor named in a will.
This is essentially the same type of return the deceased filed in life, using Form 1040 (or 1040-SR for seniors). The return is due by April 15 of the year following the person’s death. If a refund is due, a surviving spouse filing jointly or a court-appointed executor can claim it directly. Other family members may need to submit Form 1310.
Taxes for the Deceased: The Estate Income Tax Return
If the deceased’s estate (the assets they left behind) earn more than $600 in gross income in a given year following the death, someone must file a tax return for the estate. Normally the executor or the estate administrator files Form 1041, and any tax due comes out of the estate’s assets. Estate income can include things like interest, rental income, stock dividends, etc.
Federal and State Estate Taxes, aka Death Taxes
Estate taxes are a tax on the overall value of the deceased’s property before it is distributed to heirs. The federal estate tax ranges between 18 and 40 percent. However, estates valued under $15 million are exempt from this tax.
A handful of states charge their own estate tax, and Washington state is one of them. The rate is between 10 and 20 percent. The exemption threshold is $3 million.
Note: the estate pays estate taxes, not the heirs.
Inheritance and Beneficiary Taxes
There is no federal inheritance tax – that is, tax heirs must pay on an inheritance. Neither is there an inheritance tax in Washington state.
However, there can be taxes on income that comes from an inheritance. For instance, earnings from retirement accounts, such IRAs and 401(k)s, are taxable as ordinary income. Likewise, proceeds from selling inherited stocks and securities are subject to capital gains tax.
The good news is that heirs benefit from a step-up basis. In other words, the initial value for the inheritor is normally the market value of the asset on the deceased’s date of death. Thus, instead of paying taxes on the difference between what dad paid for a stock originally 30 years ago and the price it sold for now, the IRS figures the tax on the difference of the price from when it was inherited to today. It could even be a loss, which could reduce other taxes.
Links
You can grab blank copies and instructions for the tax forms mentioned here from this page on the IRS website.
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