Death of a Taxpayer Overview
Overview
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Filing Status year of death
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Joint if married
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If estate executor agrees
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Final 1040 Return
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Medical Expenses
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Those up to date of death
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If estate elects – those within a year of death
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Moving Expenses – 39- or 78-week qualification period (2018-2025: moving expense deduction generally not allowed)
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Net Operating Loss Carryovers - On final return – balance lost*
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Investment Interest Carryover - On final return – balance lost
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Charitable Contributions
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Carryover useable on final return within normal AGI-based limits – balance lost
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Post-mortem contributions claimed by beneficiaries
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Capital Loss Carryovers - Final return – balance lost*
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FBAR – Required in year of death if otherwise required.
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Business Credit Carryovers- Final return – balance lost
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Foreign Tax Credit Carryovers - Can be used estate or heirs.
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Minimum Tax Credit Carryovers - Final return – balance lost
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Passive Loss Carryovers
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Accumulated losses deductible, but limited to the excess of the property’s basis at date of death over the decedent’s adjusted basis in the property just before death
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Passive Activity Credits - Passive activity credits are effectively lost if not used on the final return.
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Exemption - Full amount allowed (Not allowed 2018-2025)
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Unrecovered Basis in Pension Plan
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Deductible on final return (Tier 1 Misc. Deduction)
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If pension is for joint lives, deduction goes to last to die
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Inherited Property Basis
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Generally FMV at date of death*
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FMV at alternate valuation date if elected (only applies if value of estate and estate tax would be less)
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Must equal the value of that property for estate tax purposes, effective for property with respect to which an estate tax return is filed after July 31, 2015, and resulted in increased estate tax.
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Holding period is automatically long-term
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Refund
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Surviving Spouse – automatic (note in signature block)
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All others – file Form 1310
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*But see “2010 modified carryover basis” in the guide "Gift & Estate Tax Planning Strategies", Form 706-NA, or Form 706-A
Related IRS Forms & Publications
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Form 706 – Estate Tax Return (Portability feature)
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Form 1310 – Refund Deceased Taxpayer
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Form 8939 - Allocation of Increase in Basis for Property Acquired from a Decedent (2010 Only)
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Form 8971 – Information Regarding Beneficiaries Acquiring Property from a Decedent
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Pub 551 – Basis of Assets
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Pub 559 – Survivors, Executors and Administrators
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Pub 502 – Medical and Dental Expenses
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Pub 925 – Passive Activity and At-Risk Rules
Very Important – Can Create a Preparer Financial Liability
For spouses dying after 2010 their unused estate tax exclusion can be passed on to the surviving spouse by electing the portability feature. However, to make that election, a Form 706 must be timely filed whether the estate’s value exceeds the statutory filing limit. Typically, when the estate is small, the executor or surviving spouse will reason there’s no need for the unused amount from the spouse’s estate and/or do not want to pay the additional cost of preparing a 706. But that is not a sure thing…there is no guarantee that the surviving spouse might not hit the lotto, receive a sizable inheritance from another decedent, or Congress might decide to reduce the estate tax exclusion. You as a practitioner must bring this issue to the attention of the executor and surviving spouse, and if they refuse to file a 706, have them sign a statement to that effect. Don’t put yourself in jeopardy for the tax on the unused exemption. See the guide "Gift & Estate Tax Planning Strategies" for details related to the portability election and a suggested statement at the end of that guide.
At the death of a taxpayer, a personal representative (e.g., estate executor/executrix) takes charge of the decedent’s property. This person may be named in the decedent’s will or trust document or appointed by the court if there is no will or trust. The duties of the representative include notifying financial institutions and other payers of income of the taxpayer’s death, collecting all the decedent’s property, paying creditors, and distributing assets to the heirs. In addition, the representative is responsible for filing various tax returns and seeing that the taxes owed are properly paid. This chapter will primarily be concerned with providing an overview of the various returns and forms that may have to be filed at a taxpayer’s death. A checklist of these forms may be found at the end of the guide.