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Plan Well, Retire Well

Saving and investing your money

Death and Taxes

Probably everyone has heard the saying, Nothing is certain but death and taxes. Based on my experience since the death of my father, I would say that income taxes are even more certain (or at least more persistent) than death. Why? Because income tax liabilities (and the responsibility to file) continue even after death. It just becomes someone else's responsibility.

When my father passed at the end of January 2013, he had not filed his income taxes for 2012. Along with other tasks, my sister and I are responsible for filing Daddy's 2012 income taxes. (If he had no executor, apparently that duty would have fallen to his survivors.) And because Daddy lived for part of 2013, it will also be our duty to file his final return for 2013. Even though his income for that single month isn't enough to require filing, there may still be reasons to file a return such as getting a refund of taxes paid and starting the clock for the statute of limitations on IRS audits.

On top of those personal income tax returns, we may also need to file an income tax return for his estate. No, my father wasn't wealthy and we don't owe estate tax. In 2013, that only applies to estates worth more than $5,250,000. We're still talking income tax here: estates with income of $600 or more t are required to file an income tax return, just like an individual. As his executors, we will have to do that each year until the estate is settled. The same would be true for a trust.

What kind of income might an estate have? During the probate process (or while the trust is in effect), some of assets that have not yet been distributed to heirs may earn income. Mutual funds or stocks could pay dividends; leases generate rent payments; bank accounts or bonds pay interest. There could also be "income in respect of a decedent" which would be money that the deceased would have received and owed taxes on if he were alive, such as a paycheck received after the date of death or installment payment on property that he sold. After his death, whoever receives that income will need to pay taxes on it. If the payments go to the heirs, they report the income and pay the taxes. If the payments go to the estate, it reports the income and pays the taxes. There are some extra rules about circumstances where the income is required to be passed through to the heirs. IRS Publication 559, Survivors, Executors and Administrators, covers all this and more.

One of the surprises about estates is that their income tax bills can add up quickly. Real people don't owe any tax until they have income of more than $10,000 for single filers or $20,000 for married filing jointly. That's based on the sum of their standard deduction and personal exemption(s) for 2013. In contrast, Daddy's estate may owe income tax with $601 of income, and it would reach the top tax bracket of 39.6% with just $11,951 of income.

And there's more bad news. The executor has more paperwork to do than just filing the taxes.

Very shortly after Daddy's death, my sister applied online for an Employer Identification number for the estate. It was quick, and you get the number right away. She could also have used Form SS-4 - Application for Employer Identification Number. While the individual tax returns for my dad will be filed under his social security number, the estate needs its own identifier. The IRS suggests applying for this "employer" ID number ASAP.

She also filed Form 56 – Notice Concerning Fiduciary Relationship shortly after that. We actually filed two of these forms – one to notify the IRS that she will be filing Dad's personal tax return and another to show that she will also be filing the tax return for the estate. From what I read, she will file new ones when the estate is closed, notifying the IRS that her role as executor is finished.

Next spring, we'll file Daddy's final 1040 as well as Form 1041, which is the estate or trust version of the personal 1040. If the estate was going to owe much tax, we would also have been paying quarterly estimated taxes using Form 1041 ES. As we receive 1099s or other statements of income next January, we'll have to check whether the income actually goes on his personal return or the estate's return, or needs to be split between the two.

Where taxes are concerned, there are a lot of details to learn after the death of a loved one. IRS Publication 559 - Survivors, Executors and Administrators is a good place to start. All of the forms mentioned above, as well as their instructions, can be found by number at

As we mentioned when Kathy and I began this series of posts about losing a loved one, neither of us are attorneys or experts in estate matters. Our goal is to just to share our experiences with you, and to hear about yours.

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