Death of a Taxpayer: How Tax Information is Handled for the Deceased

When a taxpayer dies, there are tax-related loose ends that must be tied up, especially if that taxpayer earned income during the final year of their life. The process here can be complicated and will involve several forms – all of which must be properly completed and submitted by a personal representative.

Not sure where to begin? In this guide, we’ll address how a decedent’s taxes are managed and what can be done to minimize delays or obstacles during the process.

The Decedent’s Tax Forms are the Personal Representative’s Responsibility

One of the first details to nail down following a taxpayer’s death is who will serve as their personal representative. This person is responsible for driving the process forward and completing the following tasks:

• Collecting and tabulating the decedent’s property
• Paying any outstanding creditors and distributing assets to any beneficiaries
• Ensuring all tax forms and returns are completed and submitted

It’s a heavy responsibility, which is why it’s typically assigned to a person close to the decedent. In fact, the decedent may name a personal representative in their will – this person is termed the executor. If no executor is named, or if the decedent did not leave a will, then the appointed person is called the administrator.

Personal representatives do not have authority over the decedent’s estate unless they are appointed by the court.

What if There is No Court-Appointed Representative or Executor?

If a personal representative is not named in the decedent’s will, and if the court does not appoint a representative, the IRS will allow an alternative. Specifically, the IRS will allow someone “charged with property of the decedent” to complete the decedent’s taxes and access any refunds.

The IRS does not specify who this person should be, but it’s common for the surviving spouse – if one is present – to act as a de facto personal representative. If a surviving spouse is not present, then one of the following people is usually next in line to serve as the representative:

• If a revocable trust is present – the trustee
• The person would have been the named personal representative, if probate would have been required
• A beneficiary of the decedents’ non-probate assets

What Tax Forms are Required for a Decedent’s Taxes?

Once a personal representative is settled on, they can move on with resolving the decedent’s taxes. This job can be simple or extremely complex, depending on the decedent’s tax situation. If they owned a business or large estate, for example, the representative may require assistance in discovering all assets and calculating their value.

Whether the job is simple or not, though, it can’t be completed unless certain tax forms are completed. Those forms include:

• Form 1040 – Form 1040 is the primary form for individual taxpayers and will include the decedent’s personal information, income, deductions, and credits. The income section includes all income earned from January 1 to the date of death during the decedent’s final tax year.
• Form 1041 – Form 1041 is used to report income originating from a probate estate. Form 1041 should also include any estate deductions or credits, as well as information about the estate’s beneficiaries.

An Employer Identification Number (EIN) will be required to complete Form 1041, so provisions should be made to attain one through the IRS as soon as possible.

• Form 706 – Form 706 is used to calculate the worth of the decedent’s estate and any associated estate taxes. Form 706 is complicated and includes several schedules, including areas to report real estate holdings, security investments, mortgages, cash, jointly-owned property, and any other miscellaneous assets.

Form 706 is usually only needed when an estate’s value exceeds the estate tax exclusion threshold. In 2022, this threshold was $12.06 million. In 2023, the exclusion has been raised to $12.92 million.

• Form 709 – Form 709 is used to calculate and report any gift taxes. In 2022, the gift tax exclusion threshold was $16,000, so any gifts in excess of this value will be taxed. In 2023, the exclusion threshold was raised to $17,000.

These are the most common tax forms that must be included with a decedent’s final tax return. However, additional paperwork will be necessary to complete the above forms and to satisfy the IRS’s reporting requirements.

Additional Steps to Follow to Ensure the Decedent’s Taxes are Properly Resolved

Tax forms aren’t the only paperwork the representative must complete. In addition to the above, the following will be necessary:

• Attaining an EIN – As mentioned above, an EIN will be necessary before a personal representative can complete certain tax forms. An EIN can be attained online through the IRS website, but it typically takes about four weeks before an EIN is provided.
• Providing notice of fiduciary relationship – When a taxpayer dies, the IRS requires someone to claim fiduciary responsibility over the decedent’s taxes. This is done through Form 56. On this form, the personal representative provides their personal information, their EIN, their signature, and the nature of the fiduciary relationship (executor, administrator, trustee, etc.).
• Requesting prompt assessment – Prompt assessment reduces the statute of limitations for a tax return from three years to 18 months. With prompt assessment, the IRS will respond with any notification of additional tax liabilities. This essentially confirms whether the personal representative can proceed with distributing assets to beneficiaries. Prompt assessment is requested through Form 4810.
• Request discharge from personal liability – Finally, Form 5495 is recommended for personal representatives and is typically filed in tandem with Form 4810. Form 5495 requests from the IRS any personal liability resulting from any outstanding income or gift taxes. The IRS has nine months to respond to this request if such outstanding tax liabilities are present. Following this nine-month period, the personal representative is discharged from any personal liability.

Tax Implications Can Emerge Long After a Taxpayer Dies, So Speak with an Expert to Ensure They’re Accounted For

When a taxpayer dies, they leave behind a financial record that must be squared with the IRS. This responsibility falls on the decedent’s personal representative, who may be named in a will or appointed by the court.

Regardless of how they take on the role, personal representatives are required to gather information related to the decedent’s taxes, complete an array of tax forms and ensure everything is done by the IRS book.

This can be an intimidating, confusing process for many, which is why consulting with a Houston tax preparation and planning expert is recommended. During this consultation, the Houston tax expert will lay out the best approach to completing the process, including minimizing tax burdens associated with the decedent’s assets and ensuring the personal representative fulfills their role to the letter.