| Filing a final income tax return for the year in which a | | | | (Form 1040) must be filed for the year of a death; |
| family member dies presents many unique and | | | | 7. Method of Accounting - Generally, the cash method |
| challenging tax rules. When someone dies they are | | | | is the method of accounting to be used. This method |
| referred to as the "Decedent". The decedent's final | | | | treats all income received before date of death and all |
| income tax return includes income and deductions | | | | deductible expenses paid before date of death as part |
| through the date of death. It is the responsibility of the | | | | of the final income tax return; |
| decedent's executor or personal representative to file | | | | 8. Self-Employment Income - The distributive share of |
| the final form 1040 for the deceased. The purpose of | | | | all income received or constructively received by a |
| this article is to highlight some of the unique tax rules | | | | decedent from a sole proprietorship, S Corporation or |
| that family members need to be aware of. | | | | Partnership must be included in the decedent's final |
| Summary of Tax Rules: | | | | income tax return; |
| 1. Tax Year - Although a decedent's tax year ends on | | | | 9. Losses - Net operating losses and capital losses |
| the date of death, the actual due date of the final | | | | attributable to a decedent cannot be carried over and |
| return is April 15th of the following year; | | | | used by the decedent's estate, nor can they be used |
| 2. Filing Status - A joint return may be filed for a | | | | in future years by the decedent's surviving spouse. |
| decedent and their surviving spouse as long as the | | | | These losses expire unused; |
| surviving spouse has not remarried at the end of the | | | | 10. Passive Losses - Unused passive activity loss |
| year of death and the personal representative and | | | | carry forwards are deductible on the final tax return to |
| surviving spouse both agree to file a joint return; | | | | the extent they would have been deductible had the |
| 3. Income in Respect of Decedent - Accrued, but | | | | family member not passed away. Any unused passive |
| unpaid, income as of the date of death is called | | | | activity losses not deductible on the final income tax |
| "income in respect of decedent" (IRD). IRD is excluded | | | | return expire unused at the date of death. There is a |
| from the decedent's final income tax return. This | | | | special rule regarding the use of these losses on |
| income is typically included in the estate income tax | | | | stepped up assets, but this issue is beyond the scope |
| return of the deceased (Form 1041); | | | | of this article; |
| 4. Medical Expenses - Medical costs paid from the | | | | 11. Credits - Tax credits that applied to the decedent |
| decedent's estate within one year of the day following | | | | before death can be claimed on the final income tax |
| the date of death can be deducted either on the final | | | | return. Credits not used on the final income tax return |
| tax return (Schedule A) or on the estate tax return | | | | expire unused; |
| (Form 706); | | | | 12 Return Heading/Signature - The words |
| 5. No Personal Representative - If there is no | | | | "DECEASED" need to be written across the top of |
| court-appointed personal representative of the | | | | the decedent's final income tax return. If there is no |
| deceased and no surviving spouse, Form 1310 and a | | | | personal representative, the surviving spouse must |
| copy of the death certificate must be attached to the | | | | include in the decedent's return signature space "Filing |
| final return in order to claim an income tax refund; | | | | as Surviving Spouse". |
| 6. Final Tax Return - A final individual income tax return | | | | |