Do Not Forget This Final Tax Return

Most probate and trust clients winding up the financial affairs of a deceased family member focus first and foremost on marshaling assets. Selling real estate, making claims on life insurance, inheriting retirement accounts—these are the transactions that are often on top of mind for our clients.

As we near tax time, there is one other responsibility that catches many clients by surprise—the obligation to file final state and federal tax returns for the Decedent (the person who passed away).

Let’s say John Doe is our Decedent.  Now let’s assume that John Doe passed away on April 15, 2021.  John Doe likely earned taxable income from January 1 through April 15, 2021.  Perhaps it were wages.  Perhaps it was taxable distributions from a retirement account.  Perhaps it was taxable social security distributions.  Assuming John Doe earned more income during that “stub” year from January 1 through April 15 of 2021 than the minimum income threshold necessary to trigger a tax filing obligation, a final state and federal income tax return must be filed in 2022 for John’s 2021 income.

Who has the obligation to supervise and attend to the preparation and filing of a final income tax return and payment of tax?  The Personal Representative of the Estate of John Doe would be the individual authorized to sign the tax return (and the responsibility to timely file it and pay taxes from the Estate).

What if John died, survived by his wife?  And what if John and Jane historically filed joint returns?  The good news for Jane is that she can likely still file a joint return for 2022 and might not have to file two separate returns for John and Jane. The signers on the joint return would be both Jane and the Personal Representative of John’s Estate.

Some practical tips for the Personal Representative as pertains to the final income tax return:

• Set up mail forwarding as soon as you can so that the Decedent’s mail is forwarded to you.  This ensures that IRS Form 1099s, K-1s, and W-2s, the backbone of any tax return, are received so that the final return can be prepared.
• Engage an accountant.  Nearly every will authorizes a Personal Representative to use Estate resources to hire an accountant to prepare returns.  Even in the absence of a will, accounting fees are generally recognized as an appropriate expense of administration which can be paid from Estate funds.  In other words, the Personal Representative can get the benefit and protection of a professionally-prepared return and not come out-of-pocket.
• Start with the Decedent’s accountant or tax preparer.  Who wants to “reinvent the wheel”?  Review the Decedent’s records.  If the Decedent had returns professionally-prepared, the accountant or tax preparer likely kept a copy of the prior returns.  This will be a great starting point for the final return and can help the Personal Representative ensure he/she doesn’t miss an asset, income source, or deduction.
• Now for the tricky part—if assets owned by the Decedent continue to generate income after death, that could trigger a “fiduciary income tax return” obligation.  This is an income tax return that must be filed by a Decedent’s estate or trust.

Remember—the taxman always gets paid.  Even in death!

For more information about filing tax returns for a loved one who passed away, contact Jeremy Rachlin at (301) 656-1177 or jrachlin@bulmandunie.com.