Benjamin Franklin once wrote, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” Unfortunately, these two certainties collide when a loved one passes away. Whether it’s your spouse, parent, or an estate where you’ve been appointed executor or personal representative, a final tax return is required for the year of death.
The same form is used for the final return, but “Deceased:” is written at the top, followed by the person’s name and date of death. For example, if you were married, you would still file as married, filing jointly for the year your spouse died. However, if assets were in the decedent’s name only or all assets transferred to the surviving spouse, you may also need to file an estate return. While the estate exemption is significant—$12.92 million in 2023 and $13.61 million in 2024 for individuals—the estate must make a portability election so the lifetime exemption can pass to the surviving spouse’s estate.
Only income earned between the beginning of the year and the date of death should be reported on the final return—income earned after the date of death is considered income in respect of a decedent and ultimately belongs to the estate or beneficiary. This is important if the deceased owned savings accounts, stocks, bonds, other investments, or rental property. For deductions, include all tax-deductible expenses paid before death and any medical bills paid within one year of death, as they are considered to have been paid by the decedent when the expenses were incurred. The deadline to file a final return is the tax filing deadline in the year following the taxpayer’s death.
For the year of death, a married filing jointly return will be the same; however, consider how future returns will be affected—especially if the return will become a single filing status the following year. Actions like Roth conversions or taking capital gains have a greater impact because the tax tables are tighter in the single range. Shortly after the death of a spouse, the surviving spouse should revisit their estate plan and beneficiary designations to ensure the estate plan is tax-efficient with current estate laws. Remember, the SECURE Act revised how non-spousal inherited IRAs are treated.
As a surviving spouse, tax law grants you two years after your spouse’s death to sell the home and take the $500,000 home sale exclusion for couples vs. the $250,000 allowed for single filers. If you had planned on downsizing as you aged, the availability of the larger exclusion could move up that timeline. It is critical to get an appraisal done shortly after the time of death—even if you don’t plan to sell right away. An official appraisal will provide you with the most accurate step-up in basis for inherited property—especially important if you decide to sell in later years. Relying on property tax assessment for the year of death can result in a smaller basis, which will, in turn, increase your potential gain.
Ideally, the estate executor or surviving spouse should meet with a CPA, a financial adviser, and an estate planning attorney to consider all aspects, as tax consequences shouldn’t determine the next moves if it isn’t the best financial decision.
If you have questions about filing a tax return for a decedent, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the February 17, 2024 “Henssler Money Talks” episode.
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