There are many unpleasant situations that we must deal with in life. But among the worst is when a loved one passes away and you are left to wind up their affairs. As a CPA, I often assist surviving relatives in preparing the final tax return for the deceased person and a separate return for their estate. This article will help you understand what returns need to be filed and when those returns are due.

Final 1040 — Personal Tax Return
When someone dies, their income up to the date of death may need to be reported on Form 1040. This is the individual tax return that we are all familiar with. If the deceased person was married, the surviving spouse can file this return as Married Filing Jointly (MFJ), Head of Household (HOH) or Married Filing Separate (MFS). If the deceased person was unmarried at the time of their passing, they must file Single.

The next question is whether the deceased person’s income exceeds the standard deduction. For tax year 2023, the standard deduction is:

If the deceased person’s income is below the standard deduction, filing a return is not required. If the person’s itemized deductions exceed the amount above, you need to use the itemized deduction amount instead of the standard deduction.

Finally, all income received or was paid while the person was alive must be included in the final 1040 return. This means that, if some income like social security, pension or retirement income is received in the days or weeks following the person’s death, this income must be included on the 1040 return.

Form 1041 — Income Tax Return for Estates and Trusts
Once a person passes away, that person’s assets are considered to be an estate. Or, if the person created a trust while living, the assets of the decedent are held in this trust. If these assets continue to produce income, this income needs to be reported on Form 1041 — Income Tax Return for Estates and Trusts.

The types of income that might require filing the Form 1041 would be income from investments or rental properties that continue to accrue after the death of the taxpayer. However, Form 1041 usually results in much higher tax liability than the same income reported on Form 1040. This is because of the much lower $600 standard deduction and much skinnier tax brackets.

For a married couple filing a joint tax return, for example, they do not enter the highest 37% tax bracket until their taxable income exceeds $693,750. For an estate or trust, their income is taxed at the highest 37% tax rate on income over $14,450.

That said, trusts and estates can utilize tax deductions for attorney and accountant fees, final expenses for the deceased person and payments to the beneficiaries. If you find that you are the personal representative or trustee for an estate or trust, I strongly recommend meeting with a CPA to do some end-of-year tax planning. This can reduce the estate tax burden significantly.

Form 706 — Estate Tax Return
If the decedent has a very large estate over $12.9 million and no surviving spouse, their estate will likely need to file Form 706 — Estate Tax Return. This return does not tax the income of the estate, but rather taxes the value of the estate.

If the decedent has a surviving spouse, you can file Form 706 to double the marital estate tax exemption to $25.8 million. This is a return that you will want to trust in the hands of a professional as the cost of error is massive.

If you find yourself or a loved one facing any or all of the scenarios above, please come see us at CS CPA Group and we can help you better understand the requirements and timing needed to comply with these required tax returns.

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