When someone dies you need to be aware of income tax and estate tax rules. There may be tax returns that need to be filed.
INCOME TAXES
Income Earned Before Death
A final income tax return needs to be filed for the deceased person which includes all income earned by the deceased through his or her death. This return is due on April 15 of the year following death. If the deceased person is married his or her surviving spouse may file a joint income tax return.
Retirement Plan
The beneficiary of retirement plans (IRAs, 401K etc) will need to pay taxes on funds received from the retirement account. The rules for paying income taxes on retirement plan proceeds are complex and depend on many factors. It is best to consult with a tax professional before completing any paperwork related to the retirement plan.
A surviving spouse may be able to defer the income tax consequences on the retirement account if he or she is below the age of 72. All other beneficiaries (with some limited exceptions) need to pay the income tax on the retirement plans within ten years of the deceased person’s death.
Capital Gains Taxes
Beneficiaries also need to be aware of the rules regarding capital gains taxes. When a person dies owning appreciated assets, his or her estate or beneficiaries are able to step up the basis of the inherited assets to the value at date of death.
This means if a person owns stock that he or she purchased for $50,000 and the stock is currently worth $100,000, they would pay capital gains on $50,000 of gain if they sold the stock. If they did not sell the stock prior to passing, and upon death it is worth $100,000, the capital gain is erased for the beneficiaries. If the stock is sold after death for $100,000 no capital gains will be owed.
Be sure that the broker adjusts the basis of the stock in any securities account before it is sold or distributed so that accurate information is sent to the IRS regarding capital gains.
Income Earned After Death
Income earned by an estate (interest, dividends and capital gains) need to be reported on a timely-filed estate income tax return (federal 1041 return). Tax planning is very important to make sure that the estate does not pay more taxes than necessary.
If a trust is involved, the trust will need to file an income tax return if it became irrevocable upon the death of the deceased. These tax returns are difficult and should be prepared by an experienced tax professional.
ESTATE TAXES
The State of Ohio no longer has an estate tax. If a beneficiary lives in a State other than Ohio, there may be an estate or inheritance tax due depending on the law of the State where they live.
A Federal Estate Tax return needs to be filed if an estate is over the current exemption which for 2022 is $12,060,000.00. If Congress does not take any action on January 1, 2026 the exemption amount will revert to around $6,000,000 (the actual amount will be determined based on inflation).
If the deceased person is married, it may be a good idea to file an estate tax return to preserve any unused exemption from the deceased spouse for the estate of the surviving spouse. This is called a portability election and should be considered particularly if it is possible that the surviving spouse’s estate may exceed $6,000,000.
Portability Example:
A married person dies with an estate valued at $5,000,000 in a year when the estate tax exemption is $12,000,000. If a timely federal estate tax is filed, the deceased can save the unused $7,000,000 exemption for use by his or her spouse. If the spouse dies when the exemption is $6,000,000 then the surviving spouse may exempt $13,000,000 from estate taxes ($7,000,000 unused exemption from deceased spouse plus current exemption).
Taxes upon death can be complicated and it is important to discuss the tax consequences and filing requirements with a tax professional to make sure that any taxes due are minimized. If you have any questions about taxes upon death, please contact me using the phone number or Contact Button below.
