Filing a final income tax return for the year in which a family member dies presents several challenging and unique tax rules. If somebody dies, he is referred to as the “Decedent”. The final declaration of the deceased’s income tax includes income and deductions until the date of death. It is the duty of the executor or personal representative of the deceased to present the final form 1040 for the deceased. The purpose of this article is to highlight some of the challenging tax rules that family members should know.
Summary of Tax Rules:
Even though the deceased’s tax year ends on the date of death, the real expiration date of the final declaration is April 15 of the following year.
A joint return can be filed for a decedent and his or her surviving spouse provided the surviving spouse has not remarried at the end of the year of death and the surviving spouse and personal representative agrees to file a joint return.
Income in Respect of Decedent
The accumulated income, but not paid, at the date of death, is called Income in Respect of Decedent. The income in respect of the decedent is excluded from the final declaration of the deceased’s income tax. This income is generally included in the presentation of inheritance taxes of the deceased (Form 1041).
Medical costs paid for the deceased’s estate in one year after the day of death can be removed on the estate tax return (Form 706) or on the final tax return (Schedule A);
No Personal Representative
If there is no personal representative appointed by the decedent’s court and there is no surviving spouse, Form 1310 and a copy of the death certificate should be attached to the final declaration to claim a refund of the income tax. A final income tax return must be filed (Form 1040) for the year of death.
In general, the cash method is the accounting method that will be used. This method extravagance all income received before the death date and all deductible expenses paid before the date as part of the final declaration. More details here: http://www.win-tax.ca/pay-off-debt-income-tax-refund-put-savings/
The distributive share of all income received constructively or received by a decedent from a sole proprietorship, S Corporation or partnership must be included in the final declaration of the deceased.
Capital losses and net operating losses attributable to a decedent cannot be transferred and used for the decedent’s estate, nor can they be used in future years by the surviving spouse of the deceased. These losses expire without using.
The tax credits that were applied to the deceased before the death can be claimed in the final declaration of the income tax. The credits not used in the final declaration of the income tax expire without using.
The words “Deceased” must be written on the top of the final declaration of the deceased’s income tax. Whether there is no personal representative, the surviving spouse needs to include in the signature space the deceased’s return sending as a surviving spouse.
The similar filing requirements for a personal application to the final tax return for a deceased. An individual representative needs to present the final tax return for the deceased for the year in which the person died. Also, that representative must submit statements from previous years not yet submitted.