Final income tax formalities for a diseased taxpayer

On the death of a taxpayer, IRS requires income tax formalities to be completed by the survivors. Though the procedure is straightforward, there are some specific provisions which need attention.

When a taxpayer dies, there are certain responsibilities for tax compliances. Either the executor or administrator of the state or the survivor of the taxpayer has to complete the formalities. They are relating to filing of tax return, reporting the income of the deceased, claiming appropriate deductions and claiming refunds if any. IRS ensures that either the taxpayer or the beneficiary acquiring the right for his/her income or the taxpayer’s estate is responsible to pay the tax dues.

Filing of the final return – the responsibility of filing the final return of the taxpayer is on the executor or administrator of the estate of the taxpayer. However if such person is not named, then a survivor has to do it. There is no separate form for filing return of the deceased taxpayer, the same form is to be used which was supposed to be used if the taxpayer were alive. The deadline for filing is also the same –April 15 of the following year.

The surviving spouse can proceed to file a joint return with the deceased spouse. However there is one condition – if the spouse remarries before the end of the year, then the joint return cannot be filed. In that situation the final return of the deceased will be filed under ‘married filing separately’ category.

The method of reporting income:

If the deceased has used cash method of reporting his/her income in the past, the same method has to continue. In that situation, only that income actually received by the diseased before are the date of death can be reported on the final return of the deceased. So the dividends actually received before the death must be reported in the final return. The rest of the dividends will be taxable to the survivor or beneficiary. However in case of an income from business, generally the accrual method is used.

For this reason, it is important to get the ownership changed as quickly as possible. Sometimes due to delay, the payer will report the entire income on form 1099. In that case you have to show the entire amount received to the deceased as per the records and deduct the amount actually received by the beneficiary or the estate.

Reporting of deductions

All expenses which are deductible and paid before the death can be claimed as deductions in the final return. In addition to this, the medical bills which are paid within a year from the date of death can be claimed as paid by the deceased. It is immaterial whether the bills are paid before the date of death or not. So long as they are paid within one year is of the death, you can claim them as deduction. If the deductions are not itemized, fall amount of standard deduction is available for deduction on the final return.

Inheritance of retirement accounts

If the money available at the IRAs or company retirement plans including 401 (k) and 403 (b) and the annuities are treated as income relating to the diseased and therefore is taxed to the survivors. The only exception is amounts under Roth IRAs and Roth 401(k)s. On the inherited distributions of these amounts, no tax is due, provided that the account is opened at least five years before the owner’s death. A new rule has been introduced in 2007, enabling the non spouse beneficiaries inheriting 401(k) to roll over the money to an inherited IRA. This allows them to spread the distributions and consequent tax liabilities over a period of time.

If on filing their return for the diseased a refund is due, you should complete and file a copy of form 1310, which is called Statement of Persons Claiming Refund Due to a diseased taxpayer.