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Tax Responsibilities After Someone Dies (Part 1)
Posted by Kim Chen on July 9th, 2014
© 2014 Thomson Reuters/Tax & Accounting
The death of a loved one is always difficult but it can be even more challenging if you are the one who must handle all the resulting tax responsibilities.
Who Can Be an Executor?
In most states, any U.S. citizen over the age of majority, who has not been convicted of a felony, can be named an executor. However, some states also require an executor to be a resident of the state.
Some people choose an accountant, lawyer or financial consultant because of the person’s expertise and the complexity of the job. Others appoint a spouse, adult child, relative or friend, especially if the estate is small
There are a couple different ways you can assume the required duties:
•You may be named as the executor of the decedent’s estate under his or her will.
•In the absence of a will, you could be appointed as the administrator by the probate court
Either way, the duties are essentially the same, so for purposes of this article, we’ll call the person with the responsibility the executor.
What must be done? The executor is charged with the task of finding the estate’s assets, paying off its debts, and distributing whatever is left to the rightful heirs and beneficiaries. The executor is also required to file the necessary tax returns and pay any taxes due. If you are the executor and fail to do this, the IRS can come after you personally for tax underpayments, plus penalties and interest. So you need to understand what is involved and get the proper assistance from your tax adviser.
One of the duties is to make sure the decedent’s final 1040 form is filed. The decedent’s final 1040 tax return covers the period from January 1st through the date of death. The return is due on the normal date (generally April 15 of the following year). If the decedent was unmarried, the final 1040 is prepared in the usual fashion.
When there is a surviving spouse, the final 1040 can be a joint return filed as if the decedent were still alive as of year end. The final joint return includes the decedent’s income and deductions up to the time of death, plus the surviving spouse’s income and deductions for the entire year.
The Handling of Medical Expenses
If large uninsured medical expenses were accrued but not paid before death, the executor must make an important choice about how they are treated for tax purposes. Along with any medical expenses paid before death, these accrued expenses can be deducted on the decedent’s final 1040 to the extent they exceed 10 percent of adjusted gross income (AGI) in 2014 (unchanged from 2013). This is an exception to the general rule that expenses must be paid in cash before they can be deducted. Final medical expenses can easily exceed 10 percent of AGI, especially when death occurs early in the year before much income is earned. Note: If you or your spouse is age 65 at the end of the year, the new 10 percent threshold will not take effect until 2017, meaning you can still use the 7.5 percent threshold.
Alternatively, an executor can choose to deduct the accrued medical expenses on the decedent’s federal estate tax return. Of course, this is the wrong choice if no federal estate tax is owed. However, when estate tax is due, deducting accrued medical expenses on the estate tax return is usually the tax-smart option. Why? Because the minimum estate tax rate is 40 percent in 2014 (unchanged from 2013) while the decedent’s final income tax rate could be considerably lower. Plus, the full amount of the accrued medical expenses can be deducted on the estate tax return (not just the excess over 10 percent of AGI).
Please contact our Naples CPA or Marco CPA to learn more about this.
© 2014 Thomson Reuters/Tax & Accounting