Introduction

This publication explains some of the provisions of the Victims of Terrorism Tax Relief Act of 2001. Under this Act, the federal income tax liability of those killed in the following attacks is forgiven for certain tax years.

• The April 19, 1995, attack on the Alfred P. Murrah Federal Building (Oklahoma City attack).
• The September 11, 2001, attacks on the World Trade Center, the Pentagon, and United Airlines Flight 93 in Somerset County, Pennsylvania
  (September 11 attacks).
• Terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002 (anthrax attacks).

The Act also provides other types of relief. For example, it provides that the following amounts are not included in income.

• Payments from the September 11th Victim Compensation Fund of 2001.
• Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack.
• Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack.
• Death benefits paid by an employer to the survivor of an employee if the benefits are paid because the employee died as a result of a terrorist attack.
• Debt cancellations made after September 10, 2001, and before January 1, 2002, because an individual died as a result of the September 11 attacks or anthrax attacks.

Worksheet A. Figuring the Tax To Be Forgiven

				(A) First Eligible Year (1994 or 2000)	(B) Second Eligible Year (1995 or 2001)	(C) Third Eligible Year (1996 or 2002)
1	Enter the years eligible for tax forgiveness.		1
2	Enter the total tax from the decedent's income tax return. See Table 1 on page 5 for the line number for years before 2002.		2
3	Enter the following taxes, if any, shown on the decedent's income tax return. (These taxes are not eligible for forgiveness.)
	a	Self-employment tax.	3a
	b	Social security and Medicare tax on tip income not reported to employer.	3b
	c	Tax on excess contributions to IRAs, Coverdell education savings accounts (formerly Ed IRAs), or Archer MSAs (formerly medical savings accounts).	3c
	d	Tax on excess accumulation in qualified retirement plans.	3d
	e	Household employment taxes.	3e
	f	Uncollected social security and Medicare or RRTA tax on tips or group-term life insurance.	3f
	g	Tax on golden parachute payments.	3g
4	Add lines 3a through 3g.		4
5	Tax to be forgiven. Subtract line 4 from line 2.		5
Note. If the total of columns (A), (B), and (C) of line 5 (including any amounts shown on line 15 of Worksheet B) is less than $10,000, also complete Worksheet C. Attach the computation of the tax to be forgiven or a copy of this worksheet to the decedent's final income tax return or amended tax return (Form 1040X) for each year listed on line 1. If filing Form 1040X for an eligible year, enter the amount from line 5 above on Form 1040X in column B of line 10 as a decrease in tax. The IRS will determine the amount to be refunded.

Worksheet A. Figuring the Tax To Be Forgiven (For Decedents Who Filed a Single, Married Filing Separate, or Head of Household Return)

Useful Items You may want to see:

Publication

• 547   Casualties, Disasters, and Thefts
• 559   Survivors, Executors, and Administrators

Form (and Instructions)

• 706   United States Estate (and Generation- Skipping Transfer) Tax Return
• 1040   U.S. Individual Income Tax Return
• 1040NR   U.S. Nonresident Alien Income Tax Return
• 1040X   Amended U.S. Individual Income Tax Return
• 1041   U.S. Income Tax Return for Estates and Trusts
• 1310   Statement of Person Claiming Refund Due a Deceased Taxpayer
• 4506   Request for Copy or Transcript of Tax Form

Tax Forgiveness

The IRS will forgive the federal income tax liabilities of decedents who died as a result of the Oklahoma City attack, September 11 attacks, and anthrax attacks. Income tax is forgiven for these decedents whether they were killed in an attack or in rescue or recovery operations. Any forgiven tax liability owed to the IRS will not have to be paid. Any forgiven tax liability that has already been paid will be refunded. (See Refund of Taxes Paid, later.) To determine the amount of tax to be forgiven, read Years Eligible for Tax Forgiveness first. Then read Amount of Tax Forgiven.

Decedents whose total forgiven tax liability for all eligible years is less than $10,000 are entitled to $10,000 minimum relief. Even decedents who were not required to file tax returns for the eligible tax years are entitled to $10,000 minimum relief. See Minimum Amount of Relief later under Amount of Tax Forgiven.

Years Eligible for Tax Forgiveness

The following paragraphs explain which years are eligible for tax forgiveness.

Oklahoma City attack.   For those who died from this attack, income tax is forgiven for 1994 and all later years up to and including the year of death.

Example 1.   A man was killed in the bombing of the federal building in Oklahoma City on April 19, 1995. His income tax is forgiven for 1994 and 1995.

Example 2.   A woman was wounded while walking outside the federal building in Oklahoma City on April 19, 1995. She subsequently died of her wounds in 1996. Her income tax is forgiven for 1994, 1995, and 1996.

September 11 attacks and anthrax attacks.   For those who die from these attacks, income tax is forgiven for 2000 and all later years up to and including the year of death.

Example 1.   A Pentagon employee died in the September 11 attack. Her income tax is forgiven for 2000 and 2001.

Example 2.   A visitor to the World Trade Center died in 2002 of wounds he sustained in the September 11 attack. His income tax liability is forgiven for 2000, 2001, and 2002.

Amount of Tax Forgiven

The IRS will forgive the decedent's income tax liability for all years eligible for tax forgiveness. On a joint return, only the decedent's part of the joint income tax liability is eligible for forgiveness.

To figure the tax to be forgiven, use the following worksheets.

• Use Worksheet A for any eligible year the decedent filed a return as single, married filing separately, head of household, or qualifying widow(er).
• Use Worksheet B for any eligible year the decedent filed a joint return. See the illustrated Worksheet B near the end of this publication.

Do not complete Worksheet A or B if the decedent was not required to file tax returns for the eligible tax years. Instead, complete Worksheet C and file a return for the decedent's last tax year. See Minimum Amount of Relief, later.

If you need assistance, call the IRS at 1-866-562-5227 Monday through Friday during the following times.
 

• In English-7 a.m. to 10 p.m. local time.
• In Spanish-8 a.m. to 9:30 p.m. local time.

Both spouses died.   If both spouses died as a result of a terrorist attack and they filed a joint return for an eligible tax year, fill out Worksheet B for each spouse for that year. Do this to determine if each spouse qualifies for the minimum relief of $10,000 (discussed later under Minimum Amount of Relief). If you are certain that neither spouse's total forgiven tax liability for all eligible years is less than $10,000, skip Worksheet B. However, attach a computation of the forgiven tax liability to the final income tax return or amended tax return for each eligible year. The forgiven tax liability is the total tax shown on the joint return minus the taxes listed in the instructions for line 4 of Worksheet B.

Residents of community property states.   If the decedent was domiciled in a community property state and the spouse reported half the community income on a separate return, the surviving spouse can get a refund of taxes paid on his or her share of the decedent's income for the eligible years. Also, all of the decedent's income taxes paid for the eligible years will be refunded to either the executor or administrator of the estate, or to the surviving spouse if there is no legal representative.

Worksheet B. Figuring the Tax To Be Forgiven

			(A) First Eligible Year (1994 or 2000)	(B) Second Eligible Year (1995 or 2001)	(C) Third Eligible Year (1996 or 2002)
1	Enter the years eligible for forgiveness.	1
2	Enter the decedent's taxable income. Figure taxable income as if a separate return had been filed. See the instructions.	2
3	Enter the decedent's total tax. See the instructions.	3
4	Enter the total, if any, of the decedent's taxes not eligible for forgiveness. See the instructions.	4
5	Subtract line 4 from line 3.	5
6	Enter the surviving spouse's taxable income. Figure taxable income as if a separate return had been filed. See the instructions.	6
7	Enter the surviving spouse's total tax. See the instructions.	7
8	Enter the total, if any, of the surviving spouse's taxes listed in the instructions for line 4.	8
9	Subtract line 8 from line 7.	9
10	Add lines 5 and 9.	10
11	Enter the total tax from the joint return. See Table 1 on page 5 for the line number for years before 2002.	11
12	Add lines 4 and 8.	12
13	Subtract line 12 from line 11.	13
14	Divide line 5 by line 10. Enter the result as a decimal.	14
15	Tax to be forgiven. Multiply line 13 by line 14 and enter the result.	15
Note. If the total of columns (A), (B), and (C) of line 15 (including any amounts shown on line 5 of Worksheet A) is less than $10,000, also complete Worksheet C. Attach the computation of the tax to be forgiven or a copy of this worksheet to the decedent's final income tax return or amended tax return (Form 1040X) for each year listed on line 1. If filing Form 1040X for an eligible year, enter the amount from line 15 above on Form 1040X in column B of line 10 as a decrease in tax. The IRS will determine the amount to be refunded.

Worksheet B. Figuring the Tax To Be Forgiven (For Decedents Who Filed a Joint Return)

Instructions for Worksheet B
  

Table 1. Total Tax Line on Decedent's Return

Form	1994	1995	1996	2000	2001
1040	Line 53	Line 54	Line 51	Line 57	Line 58
1040A	Line 27	Line 28	Line 28	Line 35	File Form 1040
1040EZ	Line 9	Line 10	Line 10	Line 10
TeleFile Tax Record	**	Line E	Line J	Line K
1040NR	Line 51	Line 52	Line 49	Line 54	Line 54
1040NR-EZ	N/A	Line 17	Line 17	Line 18	File Form 1040NR
* Line numbers for the 2002 forms were not available when this publication went to print. ** File Form 4506 to get a transcript of the decedent's account.

Total Tax Line on Decedent's Return

Lines 2 and 6.   Allocate income and deductions in the same manner they would have been allocated if the spouses had filed separate returns.

Allocate wages and salaries to the spouse who performed the services and received the Form W-2. Business and investment income (including capital gains) are generally allocated to the spouse who owned the business or investment that produced the income. Income from a jointly owned business or investment should be allocated equally between the spouses unless there is evidence that shows a different allocation is appropriate.

Allocate business deductions to the owner of the business. Allocate personal deductions (such as itemized deductions for mortgage interest and taxes) equally between the spouses unless there is evidence that shows a different allocation is appropriate.

Lines 3 and 7.   Figure the total tax as if a separate return had been filed. The total tax is the tax that would have been entered on the tax return line shown in Table 1 if a separate return had been filed. When figuring the tax using the Tax Table or Tax Rate Schedule, use the Married filing separately column in the Tax Table or Tax Rate Schedule Y-2.

When figuring the total tax, allocate credits and other taxes, if any, in the same manner as they would have been allocated if the spouses had filed separate returns. If a credit would not have been allowed on a separate return, allocate the credit shown on the joint return between the spouses. Examples of credits generally not allowed on a separate return are the child and dependent care credit, credit for the elderly, adoption credit, education credits, and earned income credit.

Line 4.   Enter the total, if any, of the following taxes.

• Self-employment tax.
• Social security and Medicare tax on tip income not reported to employer.
• Tax on excess contributions to IRAs, Coverdell education savings accounts (formerly Ed IRAs), or Archer MSAs (formerly medical savings accounts).
• Tax on excess accumulation in qualified retirement plans.
• Household employment taxes.
• Uncollected social security and Medicare or RRTA tax on tips or group-term life insurance.
• Tax on golden parachute payments.

Minimum Amount of Relief

The minimum amount of relief is $10,000. If the decedent's total forgiven tax liability for all eligible years is less than $10,000, the difference between $10,000 and the total forgiven tax liability for those years will be treated as a tax payment for the decedent's last tax year. The IRS will refund the difference as explained under Refund of Taxes Paid. Use Worksheet C to figure the additional tax payment. But first complete Worksheet A or B, unless the decedent was not required to file tax returns for the eligible tax years.

Example 1.   An individual who died in the September 11 attacks had an income tax liability of $-0- for 2000 and $6,400 for 2001. The $6,400 is eligible for forgiveness. The IRS will forgive $6,400 and treat the difference between $10,000 and $6,400 ($3,600) as a tax payment for 2001.

Example 2.   A child who died in the September 11 attacks had no (-0-) income tax liability for 2000 or 2001. The IRS will treat $10,000 as a tax payment for 2001.

Income received after date of death.   Generally, income of the decedent received after the date of death must be reported on Form 1041 if the estate has gross income for the tax year of $600 or more. Examples are the final paycheck or dividends on stock owned by the decedent. However, this income is exempt from income tax and is not included on Form 1041 if it is received:

• After the date of the decedent's death, and
• Before the end of the decedent's tax year (determined without regard to death).

Nonqualifying income.   The following income is not exempt from tax. The tax on it is not eligible for forgiveness.

• Deferred compensation that would have been payable if the death had occurred because of an event other than these attacks.
• Amounts that would not have been payable but for an action taken after September 11, 2001.

The following are examples of nonqualifying income.

• Amounts payable from a qualified retirement plan or IRA to the beneficiary or estate of the decedent.
• Amounts payable only as death or survivor's benefits from pre-existing arrangements that would have been paid if the death had occurred for another reason.
• Income received as a result of adjustments made by the decedent's employer to a plan or arrangement to accelerate the vesting of restricted property or the payment of nonqualified deferred compensation after the date of the attack.
• Interest on savings bonds cashed by the beneficiary of the decedent.

If you are responsible for the estate of a decedent, see Publication 559. Publication 559 discusses how to complete and file federal income tax returns and explains your responsibility to pay any taxes due.

Instructions for lines 2-9 of Worksheet C.   The tax that would have been payable on the exempt income (discussed earlier) must be considered when determining whether a decedent is entitled to the $10,000 minimum relief. To figure the tax that would have been payable, you can use lines 2 through 9 of Worksheet C. Or, if special requirements are met, you can use the alternative computation instead. See Alternative computation, later.

You have to use lines 2-9 (or the alternative computation) to figure the tax that would have been payable even if Form 1041 was not required to be filed. Use Form 1041 to figure what the taxable income would be without including the exempt income. Then enter that taxable income (even if a negative number) on line 2 of Worksheet C (or line 1 of Worksheet D, Alternative Computation of Tax on Exempt Income (Line 9 of Worksheet C)).

Alternative computation.    Instead of using lines 2-8 of Worksheet C to figure the tax on exempt income (line 9 of Worksheet C), you may be able to use Worksheet D. You can use Worksheet D to figure the tax on the exempt income payable by the estate and its beneficiaries only if both of the following requirements are met.

1. The estate claimed an income distribution deduction on line 18 (Form 1041).
2. Each beneficiary submits the information necessary to refigure the income tax payable on the exempt income received from the decedent's estate.

If requirement (2) is met but requirement (1) is not, you can still use Worksheet D if:

• Form 1041 was not required because exempt income was received, and
• The estate would have claimed an income distribution deduction if the exempt income were taxable.

If you use this alternative computation, skip lines 2-8 of Worksheet C and enter the amount from line 8 of Worksheet D on line 9 of Worksheet C. Complete the rest of Worksheet C to determine the additional payment allowed.

Worksheet C. Amount Treated as Tax Payment for Decedent's Last Tax Year

1	Minimum relief amount. Note: Before completing lines 2-9, see Instructions for lines 2-9 of Worksheet C.			1	$10,000
2	Enter the taxable income from line 22 (Form 1041)	2
3	Enter the distribution deduction from line 18 (Form 1041) .	3
4	Add lines 2 and 3.	4
5	Enter exempt income received after death minus expenses allocable to exempt income. (See Income received after date of death on page 5.)	5
6	Add lines 4 and 5.	6
7	Figure the tax on line 6 using Schedule G (Form 1041).	7
8	Figure the tax on line 4 using Schedule G (Form 1041).	8
9	Tax on exempt income. Subtract line 8 from line 7.	9
10	Enter the total of columns (A)-(C) from line 5 of Worksheet A or line 15 of Worksheet B. If the decedent was not required to file tax returns for the eligible tax years, enter -0-.	10
11	Add lines 9 and 10.			11
12	Additional payment allowed. If line 11 is $10,000 or more, enter -0- and stop here. No additional amount is allowed as a tax payment. Otherwise, subtract line 11 from line 1 and enter the result.			12
Note. The amount on line 12 is allowed as a tax payment for the decedent's last tax year (usually 1995 or 2001). Attach the computation of the additional payment allowed or a copy of this worksheet to the original or amended income tax return for the decedent's last tax year. If filing Form 1040, include the amount from line 12 above on the Other payments line of the form. Write "Sec. 692(d)(2) Payment" and the amount to the right of the entry space. Also indicate whether a Form 1041 is being filed for the decedent's estate. If filing Form 1040X, include the amount from line 12 above on Form 1040X on line 15, columns (B) and (C). Write Sec. 692(d)(2) Payment on the dotted line to the left of the entry space.

Worksheet C. Amount Treated as Tax Payment for Decendent's Last Tax Year

Worksheet D. Alternative Computation of Tax on Exempt Income (Line 9 of Worksheet C)

1	Enter the taxable income from line 22 (Form 1041)	1
2	Enter exempt income received after death minus expenses allocable to exempt income. (See Income received after date of death on page 5.)	2
3	Add lines 1 and 2	3
4	Figure the tax on line 3 using Schedule G (Form 1041).	4
5	Figure the tax on line 1 using Schedule G (Form 1041).	5
6	Estate's tax on exempt income. Subtract line 5 from line 4	6
7	Beneficiaries' tax on exempt income. Figure the total tax that would have been payable by all beneficiaries. Do this by including in each beneficiary's gross income the exempt income received from the decedent's estate and refiguring the income tax. Add the amounts by which each beneficiary's income tax is increased.	7
8	Add lines 6 and 7. Enter this amount on line 9 of Worksheet C.	8

Worksheet D. Alternate Computation of Tax on Exempt Income (Line 9 of Worksheet C)

Worksheet D. Alternative Computation of Tax on Exempt Income (Line 9 of Worksheet C)

1	Enter the taxable income from line 22 (Form 1041)	1
2	Enter exempt income received after death minus expenses allocable to exempt income. (See Income received after date of death on page 5.)	2
3	Add lines 1 and 2	3
4	Figure the tax on line 3 using Schedule G (Form 1041).	4
5	Figure the tax on line 1 using Schedule G (Form 1041).	5
6	Estate's tax on exempt income. Subtract line 5 from line 4	6
7	Beneficiaries' tax on exempt income. Figure the total tax that would have been payable by all beneficiaries. Do this by including in each beneficiary's gross income the exempt income received from the decedent's estate and refiguring the income tax. Add the amounts by which each beneficiary's income tax is increased.	7
8	Add lines 6 and 7. Enter this amount on line 9 of Worksheet C.	8

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