Publication 17: Your Federal Income Tax; Decedents

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Table of Contents

Important Reminders

Estate tax return. Generally, if the decedent died during 2003, an estate tax return (Form 706) must be filed if the gross estate is more than $1,000,000.

Estate tax repeal. The estate tax is repealed for decedents dying after 2009.

Consistent treatment of estate items. Beneficiaries must generally treat estate items the same way on their individual returns as they are treated on the estate's return. For more information, see How and When To Report under Distributions to Beneficiaries From an Estate in Publication 559, Survivors, Executors, and Administrators.

Introduction

This chapter discusses the tax responsibilities of the person who is in charge of the property (estate) of an individual who has died (decedent). It also covers the following topics.

This chapter does not discuss the requirements for filing an income tax return of an estate (Form 1041). For information on Form 1041, see Income Tax Return of an Estate—Form 1041 in Publication 559. This chapter also does not discuss the requirements for filing an estate tax return (Form 706). For information, see Form 706 and its instructions.

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A personal representative of an estate is an executor, administrator, or anyone who is in charge of the decedent's property.

Executor.

Generally, an executor (or executrix) is named in a decedent's will to administer the estate (property and debts left by the decedent) and distribute properties as the decedent has directed.

Administrator.

An administrator (or administratrix) is usually appointed by the court if no will exists, if no executor was named in the will, or if the named executor cannot or will not serve.

Personal representative.

In general, an executor and an administrator perform the same duties and have the same responsibilities. Because a personal representative for a decedent's estate can be an executor, administrator, or anyone in charge of the decedent's property, the term personal representative will be used throughout this chapter.

The surviving spouse may or may not be the personal representative, depending on the terms of the decedent's will or the court appointment.

The primary duties of a personal representative are to collect all of the decedent's assets, pay the creditors, and distribute the remaining assets to the heirs or other beneficiaries.

Notify the IRS (as discussed below) that he or she is acting as the personal representative.
File any income tax and estate tax return when due. (See Final Return for the Decedent, later.)
Pay any tax determined up to the date of discharge from duties.
Provide the payers of any interest and dividends the name(s) and identification number(s) of the new owner(s). (See Interest and Dividend Income (Forms 1099), later.)

For more information on the duties and responsibilities of the personal representative, see Duties under Personal Representative in Publication 559.

Notifying the IRS.

If you are appointed to act in any fiduciary capacity for another, you must file a written notice with the IRS stating this. Form 56 can be used for this purpose. The instructions and other requirements are given on the back of the form.

The same filing requirements that apply to individuals determine if a final income tax return must be filed for the decedent. Filing requirements are discussed in chapter 1.

Filing to get a refund.

A return should be filed to obtain a refund if tax was withheld from salaries, wages, pensions, or annuities, or if estimated tax was paid, even if a return is not required to be filed. See Claiming a refund, later. Also, the decedent may be entitled to other credits that result in a refund. See chapters 38 and 39 for additional information on refundable credits and see chapter 36 for information on the child tax credit.

Determining income and deductions.

The method of accounting regularly used by the decedent before death generally determines what income you must include and what deductions you can take on the final return. Generally, individuals use one of two methods of accounting: cash or accrual.

Cash method.

If the decedent used the cash method of accounting, include only the items of income actually or constructively received before death and deduct only the expenses the decedent paid before death. For an exception for certain medical expenses not paid before death, see Decedent in chapter 23.

Accrual method.

If the decedent used an accrual method of accounting, report only those items of income that the decedent accrued, or earned, before death. Deduct those expenses the decedent was liable for before death, regardless of whether the expenses were paid.

Additional information.

For more information on the cash and accrual methods, see Accounting Methods in chapter 1.

Who must file the return?

The personal representative (defined earlier) must file the final income tax return (Form 1040) of the decedent for the year of death and any returns not filed for preceding years. A surviving spouse, under certain circumstances, may have to file the returns for the decedent. See Joint return, later.

Example.

Samantha Smith died on March 21, 2003, before filing her 2002 tax return. Her personal representative must file her 2002 return by April 15, 2003. Her final tax return is due April 15, 2004.

Filing the return.

The word “DECEASED,” the decedent's name, and the date of death should be written across the top of the tax return. In the name and address space, you should write the name and address of the decedent and, if a joint return, of the surviving spouse. If a joint return is not being filed, the decedent's name should be written in the name space and the personal representative's name and address should be written in the remaining space.

Example.

John Stone died in early 2003. He was survived by his wife Jane. The top of their final joint return on Form 1040, which includes the required information, is illustrated on the next page.

Signing the return.

If a personal representative has been appointed, that person must sign the return. If it is a joint return, the surviving spouse must also sign it.

If no personal representative has been appointed, the surviving spouse (on a joint return) should sign the return and write in the signature area “Filing as surviving spouse.” See Joint return, later.

If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative.”

Example.

Assume in the previous example that no personal representative has been appointed. The bottom of the final joint return, which shows that Jane is filing the return as the surviving spouse, is illustrated on the next page.

Third party designee.

You can check the Yes box in the Third Party Designee area of the return to authorize the IRS to discuss the return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as the designee to answer any questions that may arise during the processing of the return. It also allows the designee to perform certain actions. See your income tax package for details.

Claiming a refund.

Generally, a person who is filing a return for a decedent and claiming a refund must file Form 1310 with the return. However, if the person claiming the refund is a surviving spouse filing a joint return with the decedent, or a court-appointed or certified personal representative filing an original return for the decedent, Form 1310 is not needed. The personal representative must attach to the return a copy of the court certificate showing that he or she was appointed the personal representative.

If the personal representative is filing a claim for refund on Form 1040X, Amended U.S. Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, and the court certificate has already been filed with the IRS, attach Form 1310 and write “Certificate Previously Filed” at the bottom of the form.

Example.

Mr. Green died before filing his tax return. You were appointed the personal representative for Mr. Green's estate and you file his Form 1040 showing a refund due. You do not need Form 1310 to claim the refund if you attach a copy of the court certificate showing you were appointed the personal representative.

When and where to file.

The final income tax return is due at the same time the decedent's return would have been due had death not occurred. The final return for a decedent who was a calendar year taxpayer is generally due April 15 following the year death occurred. However, when the due date falls on a Saturday, Sunday, or legal holiday, the return is filed timely if filed by the next business day.

Generally, you must file the final income tax return of the decedent with the Internal Revenue Service Center for the place where you live. A tax return for a decedent can be electronically filed.

Joint return.

Generally, the personal representative and the surviving spouse can file a joint return for the decedent and the surviving spouse. However, the surviving spouse alone can file the joint return if no personal representative has been appointed before the due date for filing the joint return for the year of death. This also applies to the return for the preceding year if the decedent died after the close of the preceding tax year and before filing the return for that year. The income of the decedent that was includible on his or her return for the year up to the date of death (as explained under Determining income and deductions, earlier) and the income of the surviving spouse for the entire year must be included in the final joint return.

A joint return with the decedent cannot be filed for the year of death if the surviving spouse remarried before the end of the year of the decedent's death. The filing status of the decedent in this instance is married filing separate return.

Personal representative may revoke joint return election.

A court-appointed personal representative may revoke an election to file a joint return that was previously made by the surviving spouse alone. This is done by filing a separate return for the decedent within one year from the due date of the return (including any extensions). The joint return made by the surviving spouse will then be regarded as the separate return of that spouse by excluding the decedent's items and refiguring the tax liability.

Relief from joint liability.

In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. If the decedent qualified for this relief while alive, the personal representative can pursue an existing request, or file a request, for relief from joint liability. For information on requesting this relief, see Filing a Joint Return in chapter 2.

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Form 1040 Label and Signature Area

This section explains how to report certain types of income on the final return. The rules on income discussed in the other chapters of this publication also apply to a decedent's final return. See chapters 6 through 17, if they apply.

A Form 1099 should be received for the decedent reporting interest and dividends earned before death. These amounts must be included on the decedent's final return. A separate Form 1099 should show the interest and dividends earned after the date of the decedent's death and paid to the estate or other recipient that must include those amounts on its return. You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts.

For example, a Form 1099–INT reporting interest payable to the decedent may include income that should be reported on the final income tax return of the decedent, as well as income that the estate or other recipient should report, either as income earned after death or as income in respect of the decedent (discussed later). For income earned after death, you should ask the payer for a Form 1099 that properly identifies the recipient (by name and identification number) and the proper amount. If that is not possible, or if the form includes an amount that represents income in respect of the decedent, report the interest, as shown next under How to report.

See U.S. savings bonds acquired from decedent in Publication 559 for information on savings bond interest that may have to be reported on the final return.

How to report.

If you are preparing the decedent's final return and you have received a Form 1099–INT for the decedent that includes amounts belonging to the decedent and to another recipient (the decedent's estate or another beneficiary), report the total interest shown on Form 1099–INT on Schedule 1 (Form 1040A) or on Schedule B (Form 1040). Next, enter a subtotal of the interest shown on Forms 1099 and the interest reportable from other sources for which you did not receive Forms 1099. Then, show any interest (including any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. Identify this adjustment as a “Nominee Distribution” or other appropriate designation.

Report dividend income for which you received a Form 1099–DIV, Dividends and Distributions, on the appropriate schedule using the same procedure.

Note.

If the decedent received amounts as a nominee, you must give the actual owner a Form 1099, unless the owner is the decedent's spouse. See General Instructions for Forms 1099, 1098, 5498, and W–2G, for more information on filing forms 1099.

Accelerated death benefits are amounts received under a life insurance contract before the death of the insured individual. These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider.

Generally, if the decedent received accelerated death benefits either on his or her own life or on the life of another person, those benefits are not included in the decedent's income. This exclusion applies only if the insured was a terminally or chronically ill individual. For more information, see Accelerated death benefits under Gifts, Insurance, and Inheritances in Publication 559.

This section discusses some of the business income which may have to be included on the final return.

Partnership income.

The death of a partner closes the partnership's tax year for that partner. Generally, it does not close the partnership's tax year for the remaining partners. The decedent's distributive share of partnership items must be figured as if the partnership's tax year ended on the date the partner died. To avoid an interim closing of the partnership books, the partners can agree to estimate the decedent's distributive share by prorating the amounts the partner would have included for the entire partnership tax year.

On the decedent's final return, include the decedent's distributive share of partnership items for the following periods.

The partnership's tax year that ended within or with the decedent's final tax year (the year ending on the date of death).
The period, if any, from the end of the partnership's tax year in (1) to the decedent's date of death.

S corporation income.

If the decedent was a shareholder in an S corporation, include on the final return the decedent's share of the S corporation's items of income, loss, deduction, and credit for the following periods.

The corporation's tax year that ended within or with the decedent's final tax year (the year ending on the date of death).
The period, if any, from the end of the corporation's tax year in (1) to the decedent's date of death.

Self-employment income.

Include self-employment income actually or constructively received or accrued, depending on the decedent's accounting method. For self-employment tax purposes only, the decedent's self-employment income will include the decedent's distributive share of a partnership's income or loss through the end of the month in which death occurred. For this purpose, the partnership income or loss is considered to be earned ratably over the partnership's tax year. For more information on how to compute self-employment income, see Publication 533, Self-Employment Tax.

Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was established reaches age 30, or dies, whichever is earlier. The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. If the decedent's estate acquires the interest, the earnings on the account must be included on the final income tax return of the decedent. If a beneficiary acquires the interest, see the discussion under Income in Respect of the Decedent, later.

The age 30 limit does not apply if the individual for whom the account was established, or the beneficiary that acquires the account, is an individual with special needs. This includes an individual who because of a physical, mental, or emotional condition (including a learning disability) requires additional time to complete his or her education.

For more information on Coverdell ESAs, see Publication 970, Tax Benefits for Education.

The treatment of an Archer MSA or a Medicare+Choice MSA, at the death of the account holder, depends on who acquires the interest in the account. If the decedent's estate acquires the interest, the fair market value of the assets in the account on the date of death is included in income on the decedent's final return.

If a beneficiary acquires the interest, see the discussion under Income in Respect of the Decedent, later. For more information on Archer MSAs, see Publication 969, Medical Savings Accounts (MSAs).

Generally, the rules for exemptions, deductions, and credits allowed to an individual also apply to the decedent's final income tax return. Show on the final return deductible items the decedent paid (or accrued, if the decedent reported deductions on an accrual method) before death.

You can claim the decedent's personal exemption on the final income tax return. If the decedent was another person's dependent (for example, a parent's), you cannot claim the personal exemption on the decedent's final return.

If you do not itemize deductions on the final return, the full amount of the appropriate standard deduction is allowed regardless of the date of death. For information on the appropriate standard deduction, see chapter 22.

If the total of the decedent's itemized deductions is more than the decedent's standard deduction, the federal income tax will generally be less if you claim itemized deductions on the final return. See chapters 23 through 30 for the types of expenses that are allowed as itemized deductions.

Medical expenses.

Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. This includes expenses for the decedent as well as for the decedent's spouse and dependents.

Qualified medical expenses are not deductible if paid with a tax-free distribution from an Archer MSA.

For information on certain medical expenses that were not paid before death, see Decedent in chapter 23.

Unrecovered investment in pension.

If the decedent was receiving a pension or annuity (with an annuity starting date after 1986) and died without a surviving annuitant, you can take a deduction on the decedent's final return for the amount of the decedent's investment in the pension or annuity contract that remained unrecovered at death. The deduction is a miscellaneous itemized deduction that is not subject to the 2% limit on adjusted gross income. See chapter 30.

A decedent's net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent's final income tax return. A net operating loss on the decedent's final income tax return can be carried back to prior years (see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts). You cannot deduct any unused net operating loss or capital loss on the estate's income tax return.

Any of the tax credits discussed in this publication also apply to the final return if the decedent was eligible for the credits at the time of death. These credits are discussed in chapters 34 through 39.

Tax withheld and estimated payments.

There may have been income tax withheld from the decedent's pay, pensions, or annuities before death, and the decedent may have paid estimated income tax. To get credit for these tax payments, you must claim them on the decedent's final return. For more information, see Credit for Withholding and Estimated Tax in chapter 5.

This section contains information about the effect of an individual's death on the income tax liability of the survivors (including the widow or widower and any beneficiaries) and the estate. A survivor should coordinate the filing of his or her own tax return with the personal representative handling the decedent's estate. The personal representative can coordinate filing status, exemptions, income, and deductions so that the decedent's final return and the income tax returns of the survivors and the estate are all filed correctly.

Gifts and inheritances.

Property received as a gift, bequest, or inheritance is not included in your income. However, if property you receive in this manner later produces income, such as interest, dividends, or rent, that income is taxable to you. If the gift, bequest, or inheritance you receive is the income from property, that income is taxable to you.

If you inherited the right to receive income in respect of the decedent, see Income in Respect of the Decedent, later.

Joint return by surviving spouse.

A surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years. For more information, see Qualifying Widow(er) With Dependent Child in chapter 2.

Decedent as your dependent.

If the decedent qualified as your dependent for the part of the year before death, you can claim the exemption for the dependent on your tax return, regardless of when death occurred during the year.

If the decedent was your qualifying child, you may be able to claim the child tax credit. See chapter 36.

All income that the decedent would have received had death not occurred and that was not properly includible on the final return, discussed earlier, is income in respect of the decedent.

If the decedent is a specified terrorist victim (see Publication 3920, Tax Relief for Victims of Terrorist Attacks), any income received after the date of death and before the end of the decedent's tax year (determined without regard to death) is excluded from the recipient's gross income. This exclusion does not apply to certain income.

Income in respect of a decedent must be included in the income of one of the following.

If you have to include income in respect of the decedent in your gross income and an estate tax return was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income. For more information, see Publication 559.

Example 1.

Frank Johnson owned and operated an apple orchard. He used the cash method of accounting. He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. The proceeds from the sale are income in respect of the decedent. When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. When Frank's widow collects the $2,000, she must include that amount in her return. It is not to be reported on the final return of the decedent or on the return of the estate.

Example 3.

Cathy O'Neil was entitled to a large salary payment at the date of her death. The amount was to be paid in five annual installments. The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. The payments are income in respect of the decedent. None of the payments were includible in Cathy's final return. The estate must include in its income the two installments it received, and you must include in your income each of the three installments as you receive them.

Transferring your right to income.

If you transfer your right to income in respect of a decedent, you must include in your income the greater of:

The amount you receive for the right, or
The fair market value of the right at the time of the transfer.

Fair market value (FMV).

FMV is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

Giving your right to income as a gift.

If you give your right to receive income in respect of a decedent as a gift, you must include in your income the fair market value of the right at the time you make the gift.

Type of income.

The character or type of income that you receive in respect of a decedent is the same as it would be to the decedent if he or she were alive. If the income would have been a capital gain to the decedent, it will be a capital gain to you.

Inherited IRAs.

If a beneficiary receives a lump-sum distribution from a traditional IRA he or she inherited, all or some of it may be taxable. The distribution is taxable in the year received as income in respect of a decedent up to the decedent's taxable balance. This is the decedent's balance at the time of death, including unrealized appreciation and income accrued to date of death, minus any basis (nondeductible contributions). Amounts distributed that are more than the decedent's entire IRA balance (including taxable and nontaxable amounts) at the time of death are the income of the beneficiary.

If the beneficiary of a traditional IRA is the decedent's surviving spouse who properly rolls over the distribution into another traditional IRA, the distribution is not currently taxed. A surviving spouse can also roll over tax free the taxable part of the distribution into a qualified plan, section 403(b) annuity, or section 457 plan.

Example.

At the time of his death, Greg owned a traditional IRA. All of the contributions by Greg to the IRA had been deductible contributions. Greg's nephew, Mark, was the sole beneficiary of the IRA. The entire balance of the IRA, including income accruing before and after Greg's death, was distributed to Mark in a lump sum. Mark must include the total amount received in his income. The portion of the lump-sum distribution that equals the amount of the balance in the IRA at Greg's death, including the income earned before death, is income in respect of the decedent.

For more information on inherited IRAs, see Publication 590, Individual Retirement Arrangements (IRAs).

Roth IRAs.

Qualified distributions from a Roth IRA are not subject to tax. A distribution made to a beneficiary or to the Roth IRA owner's estate on or after the date of death is a qualified distribution if it is made after the 5-year tax period beginning with the first tax year in which a contribution was made to any Roth IRA of the owner.

Part of any distribution to a beneficiary that is not a qualified distribution may be includible in the beneficiary's income. Generally, the part includible is the earnings in the Roth IRA. Earnings attributable to the period ending with the decedent's date of death are income in respect of the decedent. Additional earnings are the income of the beneficiary.

For more information on Roth IRAs, see Publication 590.

Coverdell education savings account (ESA).

If the decedent's spouse or other family member is the designated beneficiary of the decedent's account, the Coverdell ESA becomes that person's Coverdell ESA. It is subject to the rules discussed in Publication 970.

Any other beneficiary (including a spouse or family member who is not the designated beneficiary) must include in income the earnings portion of the distribution. Any balance remaining at the close of the 30-day period is deemed to be distributed at that time. The amount included in income is reduced by any qualified education expenses of the decedent that are paid by the beneficiary within 1 year after the decedent's date of death.

Archer MSA.

If the decedent's spouse is the designated beneficiary of the account, the account becomes that spouse's Archer MSA. It is subject to the rules discussed in Publication 969.

Any other beneficiary (including a spouse that is not the designated beneficiary) must include in income the fair market value of the assets in the account on the decedent's date of death. This amount must be reported for the beneficiary's tax year that includes the decedent's date of death. The amount included in income is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the decedent's date of death.

Other income.

For examples of other income situations concerning decedents, see Specific Types of Income in Respect of a Decedent in Publication 559.

Items such as business expenses, income-producing expenses, interest, and taxes, for which the decedent was liable but that are not properly allowable as deductions on the decedent's final income tax return will be allowed as a deduction to one of the following when paid.