When a person dies, there are certain tax reporting responsibilities that survive death.
Personal Income Taxes.
A personal income tax return (Federal and State 1040) will need to be filed for the final year of a person’s life. For example, if they passed away in 2022, a final personal income return is due April 15, 2023. This return includes all wages, interest, dividends and capital gains earned by the deceased person through his or her date of death.
The return is generally filed by the Executor of the estate if an estate is opened with the probate court. If there is no probate estate, a return may be filed by the surviving spouse or the person in charge of the deceased person’s property who would sign the return as “personal representative.”
If the deceased person was married, a joint return may be filed for the year in which the decedent died.
If a probate estate is involved, any tax due for the final taxable year will be paid out of the estate and any refund will be deposited into the estate checking account. Be sure to file Form 1310 if a refund is due.
Estate Income Tax Return
All income, including interest, dividends and capital gains earned after death is reported on an estate income tax return (IRS Form 1041 or State of Ohio form IT 1041).
The date for filing the estate income tax return generally is the 15th day of the fourth month following the close of the taxable year. Estates do not need to use a calendar year and it can be advantageous not to use a calendar year in many cases.
The estate will pay any tax due with the return, unless it is the final year of the estate in which case the income tax consequences may be passed out to the beneficiaries. If the beneficiaries are responsible for any tax consequences it will be reported to them on a K-1.
These tax returns can be complicated and are best prepared by an accountant familiar with estate income tax return.
Trust Tax Returns
Upon death, most trusts will become irrevocable and a trust must file a tax return reflecting all taxable income earned after it became irrevocable.
All income, including interest, dividends and capital gains earned by the trust should be reported under the trust taxpayer identification number assigned to the trust by the IRS.
The tax return used to report income tax for the trust is called a fiduciary income tax return. For the IRS, it is Form 1041. For the Ohio Department of Revenue, it is Form IT1041. Trust income tax returns are filed on a calendar basis and are due on April 15 each year until the trust is terminated.
If trust distributions were made during the year, then the beneficiaries may have tax consequences to report on his or her tax return. After the return is filed, the beneficiaries will be provided with a K-1 with this information. You should advise the beneficiaries that they will be receiving a K-1.
An accountant may be retained and paid out of the trust funds to prepare the return.
