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Death by Taxes, Part 1:

November 8, 2019

An introduction to the world of taxes in the year of death.

Aunt Matilda passed peacefully in her sleep on June 25th, 2019. In the weeks following, as the family was cleaning out Matilda’s home, Frank began to panic about the tax consequences of his mother’s passing. Do I need to file a tax return for my mom? What deadlines do I need to worry about? What happens when we sell the home? Can I just assume her investments, tax-free? Don’t worry Frank, we are here to help. Stick with us throughout this series as we answer each of your questions.

Question 1: Do I need to file a tax return for my mom?

In the year of death, there are multiple tax returns and filing requirements that may apply. Depending on the value of the assets in the estate and the income the decedent received in the year of death, you may need to file three different returns.

Form 1040: First of all, 1040 may be required to report all income through the date of death. A good starting point is to look at the prior year’s 1040. Note, you may not find 1040 for the prior year if the individual’s only source of income was Social Security.

Additionally, an executor or administrator may need to be appointed to sign the return if there is no surviving spouse. Your lawyer can assist with the appointment of an executor/administrator. Other forms that may be required include Form 56, Form 1310, and a statement showing the appointment of an executor or administrator. Matilda was pretty well off. She received quite a bit of investment income prior to her passing. It looks like Matilda will need to file a 1040 for 2019.

Form 706: In addition to the 1040, if the value of the gross estate exceeds $11.4M (2019), the estate must file Form 706. Form 706 is a one-time filing to report all assets and projected liabilities of the estate. You can think of it as a “snapshot” on the date of death. Due to Matilda’s personal residence, 2 vacation homes, and extensive investments, she is required to file Form 706.

Form 1041: Regardless of whether Form 706 is required, a 1041 may be required to report all the income from the estate assets. For example, if the estate owns a rental home, the rental income received will be taxable to the estate. More commonly, the investments owned by the decedent that were transferred into the estate will earn dividends and interest that are taxable to the estate.

The 1041 is also where you would report gains and losses from the sale of estate assets. Luckily, a step up in basis to fair market value is applied on the date of death. That way, if Aunt Matilda bought her home in 1942 for $25,000 and the estate sold it the year after her passing for $800,000, the estate only pays tax on the appreciation between the date of death and the date of sale, rather than paying the full $775,000. This can get rather complicated, so it is advised that you contact your CPA for further information.  

While the above information briefly discusses potential required tax forms, there are many variances and nuances that can quickly change the filing requirements in the year of death, as well as what is reported on each return. Seek the advice of your lawyer and CPA to ensure everything is done correctly. For now, I think Frank has a good idea as to what returns need to be filed for his mother.

If you have any questions regarding anything you’ve seen in this article please contact Diane Tiveron or Sarah DesJardins at 716-636-7600.

Be on the lookout for Part 2 of this series, where we will discuss the deadlines for each of the above returns.