Because this is not often encountered, a number of tax practitioners are doubtful whenever they are asked to prepare the decedent’s final illness tax form. Often times, tax practitioners do this differently compared to how a living client would do it. They determine who signs the return especially in the stead of the decedent.
In this situation, it is better than the patient takes control of the situation and then make the form for decedent’s final illness be effective especially when planning the post-mortem. Practitioners can also aim to confidently access the Final Form 1040 and then calculate the tax savings for the family of the decedent.
Here is some necessary information about tax planning as well as preparation for the decedent’s final illnesses.
Stop concluding an estimate of tax payments
When a taxpayer dies, this individual is no longer required to make tax payments, especially those that are estimated. There are family members that continue to submit the quarterly estimated tax vouchers especially during their final illness but the truth of the matter is, this is not a requirement. In fact, when this is done, funds are taken out of the investment portfolio of the individual. If they do not do this, they could be earning income and growing their business instead.
Another thing to note is that no joint estimate of the tax payments can occur after the death of the decedent. The estate is also not liable to make payments. The tax year of the decedent finishes on the day he dies so the only income that is received until that date is reported on the Final Form 1040. If the deceased paid an amount every quarter in order to cover a tax liability that is expected of him, then he would no longer need to even generate those payments even after the end of that particular tax year. However, the spouse that survives the decedent has to make an estimate of the payments for the tax liability of his or her own.
If the taxpayer is already deceased and took advantage of the safe harbor tax in the prior year then he can make estimated payments. Form 1040 can then end up with a balance that is due later that year as long as the tax preparer eliminates the filing of Form 2210. This is the Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
The surviving spouse that files the joint return does not have to do anything in particular. Instead, the spouse signs on the departed’s behalf. If someone aside from the behalf is appointed by any court to administer the affair of the decedent, that personal representative or executor must sign this return and then attach copies of the certificate which clearly shows that an appointment was officially made.
If the return has an overpayment of taxes then it is clearly not a joint return associated with the surviving spouse. There is also no court-appointed personal representative or executor. The Statement of Person Claiming Refund Due to a Deceased Taxpayer of Form 1310 must then be filed and attached is the return that a refund must be obtained.
Cases of a Refund
If the decedent has incurred medical expenses during the illness and departed early during the year, this reports to a less substantial income. The family of the policyholder must then consider a separate filing because this would save taxes and let medical expenses exceed the gross income threshold. It creates an overall result for the loved ones of the policyholder.
Savings Bond Interest is Taxable to the Holder of the Bond
Here is a planning strategy for post-mortem. Savings bonds used to be popular among the older generation. Decedents have bonds that contain accrued interest and roll them into bonds that have been converted. These kinds of bonds accrue interest until the policy matures. This accrued interest that has not been taxed will eventually be taxed when the policyholder of the bond cashes this.
There is an exception that lets the accrued bond interest be reported on the final illness Form 1040. This saves the tax and carries these over the beneficiaries of the child’s marginal tax rate. This rate depends if the interest is cashed with the bonds.
It is very important to consider reporting. The interest that is accrued through the day the decedent passes away is listed on the Final Form 1040. Afterward, the beneficiaries then cash these bonds. They will then receive Forms 1099-INT or what is called Interest Income. The interest that they receive will be more than what is reported by the decedent final illness. This also continues as a form of accruement on bonds.
Those who have been listed as beneficiaries by the policyholder must report the interest on personal returns in order to avoid duplicates from the IRS. On the next line that is indicated Schedule B and with the subject Interest and Ordinary Dividends, beneficiaries must deduct it as negative income items with explanations that interest is also reported by the decedent. This is under Sec 454 of the policy. Bonds must also be cashed as quickly as possible. If these are cashed out five to ten years after the passing away of the decedent, it is easy to lose track of the accrued interest. The date of the decadent’s passing away must also be reported so that it can be taxed.
If the decedent turns out to be the beneficiary of the said bond, then this is for the best. When preparing Form 1041 or what is called the US Income Tax Return for Estates and Trust, the one filling up the tax or referred to as tax practitioner controls the process and reports the interest of the bond. The estate eventually reaches the possible rate of the federal tax.
However, if the decedent’s final Form 1040 is of a love tax rate, the family can definitely save from the taxes. It still depends on the value of the bond interest. They can also save if they report the interest of the bond and list this on Final Form 1040.
Allocating the income between pre-and-post death reporting
When a loved one passes away, they list the date of death and then most of the beneficiary, or family members, cannot obtain the federal ID for the estate. They also call the brokers and open new accounts and make sure that this is listed under the estate’s name. Then they transfer the decedent’s assets to those accounts that were newly created. This cannot be completed immediately due to the legal processes especially the appointment of the personal representative or executive. This takes time. The Forms 1099 that is strictly for investment earnings, especially for the year when the decedent passed away, is messy. This is usually included in activities that have taken place after the day the decedent passed away. It may also include the sales of securities and the basis that it has been adjusted to the values of the date of death.
The income that has been earned prior to the death of the decedent must be allocated to the Form 1040. Any earnings that have been accumulated after the decedent’s death must then be reported on Form 1040 to report this to the estate or to the return of the beneficiary. If this is an asset or a title that must be immediately transferred on the time of the decedent’s death, then the post-death earnings must be considered and reported to the surviving spouse.
Usually, the surviving spouse files jointly alongside the decedent. If this is the case, then this must be moved to a post-death income so that the Form 1041 can let the expenses incur even after the decedent passes away. The administrative expenses that have been incurred because of the policy holder’s death, along with the administrative expenses can also be incurred due to death. The administrative expenses can also be incurred due to death and to the offset of the post-death income. This is to consider the cost that is prepared and listed on Form 1041 that can be used by the expenses and for the income to be offset.
Medical Expenses concerning the Decedent’s Final Illness
Medical expenses can be deducted from the Final Form 1040 or in the form of debt and the federal estate return. This is also called Form 706 or United States Estate Tax Return. This is also Generation-Skipping Transfer. Here, the greatest benefit can be derived. When this is deducted and listed on Form 1040, then any expense that has been paid from that year is also deducted. It does not matter if it was paid before or even after the death of the decedent.
Medical expenses are eligible for the deduction on Form 706 and the ones that have been paid are only after the decedent’s death. Medical expenses will not and can never be deducted from Form 1041.
Federal Estate Tax is Not Deductible and State Estate Tax is Deductible
The federal, as well as the state estate tax, are deducted on the tax return of the federal income. However, beneficiaries can also be entitled to receive itemized deductions for the estate and also use this as what they call the generation-skipping tax that is transferred and eventually attributed to the income tax. This is due respect to the decent (IRD) and then placed on the individual income tax returns allocated for the year that is included in the income. Funeral expenses cannot be deducted on the income tax return.
Federal Income Tax Is Deductible
Amounts that are indebted to the final ITR or income tax return can be deducted as debt on the estate return. This is also called the Form 706. Meanwhile, income tax refunds can also be taxable to an estate in the form of accounts receivable.
There is an option that is regarded as the deathbed conversion and moving it to Roth IRA. If the tax is then converted to the IRA and then it reduces the overall size of the federal and taxable estate and then it leads to less income tax and then allocates this to the beneficiaries whenever they take withdrawals. This is what can benefit the loved once. By cashing the IRA as a whole before the decedent passes away, then the beneficiaries can lose the tax-free growth in the account balance which occurs over the expectancy of one life.
Think about taking the IRA withdrawals when the decedent is closing into his or her final illness. If the beneficiary is near death, then it is enough that his or her income can be quite low and much to the withdrawal of the IRA. This would then proceed and fall to lower tax brackets. By taking that large IRA withdrawal and getting the amount then the resultant federal income tax can also be reduced to the assets of the estate when the decedent passes away. It can also be deducted to what is already owed to the estate which then leads to the same low figure.
Extending Form 1040 to Facilitate the Planning During Post-Mortem
Form 706 or what is also called the federal estate tax return can also be due nine months after the decedent passes away. Form 1041 or what is called the estate income tax return is also used as a fiscal year-end that can also be accepted on the last day of the month which falls in the next year before the month the decedent passed away. Form 1041 is due the 15th days of the fourth month after the end of the tax year.
It is often preferred that the Final Form 1040 be extended and then prepared these returns so that all the angles are considered. Form 1040 is due every April 15 and when the decedent or the taxpayer passes away then there is a six-month extension that can be received when Form 4868 is filed. Taking the extension can then provide flexibility in determining the things that have been reported and then obtained to the over-all tax of the family.