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Estate Planning

What Happens If a Deceased Individual Owes Taxes?

Ty McDuffey

December 15, 2022

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Taxes are probably the last thing on your mind following the loss of a loved one, but bills do not go away. They must be addressed as soon as possible to avoid unanticipated financial effects.

If a deceased individual owes taxes, the IRS may pursue the estate until the unpaid amounts are paid. The Collection Statute Expiration Date (CSED) for tax collection is around ten years, meaning the IRS can continue to pursue the estate for that time.

It is common for the deceased to have outstanding tax liabilities at the time of their death. Fortunately, there are a few things you can do to make the process of paying off a loved one's taxes as easy as possible.

Key Takeaways:

  • Executors are frequently required to submit a final tax return plus an estate tax return, including any inheritance or estate taxes.

  • You can file a joint tax return as a surviving spouse for the final year your spouse was alive.

  • Before you begin, try to find all Form 1040s, W-2s, and 1099s as though you were filing your own taxes.

Notice: Please keep in mind that this is general advice and shouldn’t be construed as particular monetary or tax advice. You should consult with a lawyer or a tax consultant if you have particular questions.

Who Is Responsible for Paying a Deceased Person's Taxes?

Typically, the person responsible for paying tariffs on behalf of a deceased individual is identified in the estate plan. This individual will be in charge of the estate's settlement and will have access to the information and accounts required to pay the unpaid taxes. 

They will also be responsible for organizing any refunds that may be necessary. 

There are several approaches to managing this task depending on the situation:

  • The Administrator of the Estate is usually responsible for managing outstanding costs, closing relevant accounts, and distributing inheritances as stated. Therefore, they might be put in charge of paying a deceased person's taxes.

  • An Appointed Legal Representative may handle the deceased's tax issues. This might be a family or estate planning attorney. They will also have access to financial information and will be able to deal with owed taxes quickly.

  • If the dead were married, the surviving spouse might also assume tax responsibilities, especially if they filed jointly for the year. 

  • It should be noted that taxes for the year of death and maybe the preceding year can be submitted jointly (if the death occurred before taxes were filed). This would need to be included in the tax filing by the surviving spouse.

  • The obligation usually falls on a loved one or the next of kin in the absence of an estate plan, a spouse, or an appointed legal representative.

What Happens if You Don't File Taxes for a Deceased Individual?

If you do not file taxes for a deceased person, the IRS can take legal action against the estate by putting a federal lien on it. This basically implies that you must pay your federal taxes before you may close any other obligations or accounts. If not, the IRS can require that the deceased's legal representative pay the taxes.

Funeral expenditures and accompanying administrative charges are exempt and can be paid before any unpaid taxes on behalf of the deceased. 

If the decedent owed taxes for several years, you could work with the IRS to demonstrate that you were unaware of the outstanding sums. Typically, this will need the assistance of a tax planning lawyer or CPA. 

Which Assets Are Protected from the IRS?

Some assets in an estate are exempt from debt, including tax debt.

Life Insurance Benefits

These benefits are paid immediately to the listed recipients and are not subject to probate. 

Unless the beneficiary additionally consented to be accountable for the obligation, the benefits are free from the debt. If a couple owes taxes and one of them dies while naming the other in a life insurance policy, a portion of the life insurance benefit will be due to the tax liability. 

401(k) Retirement Account

The assets in a 401K investment account are usually excluded from IRS taxation. 

When the account is opened, the account holder names a beneficiary, and the assets in the 401K flow straight to the beneficiary without going through probate. The only exception is if the 401K owner owes child support.

Are Beneficiaries Liable for the Deceased's Debts?

Beneficiaries are not liable for debts left by the dead, and creditors cannot regard them as such under the law.

Furthermore, because these monies flow directly to the beneficiary and do not pass through probate, eligible retirement accounts, life insurance profits, and funds put in certain types of trusts do not have to be utilized to pay for the decedent's debts.

What Is the Estate Administrator's Role in Paying the Deceased's Taxes?

When someone dies, an heir or executor of the estate may petition the court to settle the inheritance. You are entitled to act on behalf of the deceased after an estate administrator is legally appointed.

As a result, you must gather all assets (cash, bank accounts, titles, personal property, etc.) and settle obligations with creditors. It is critical to note that assets cannot be distributed to heirs until the debt is settled.

In terms of taxes, the administrator is responsible for filing any unfiled returns with the IRS.

Furthermore, the administrator must pay back taxes before the debt is totally erased.

The job of an estate administrator is time-consuming and difficult. As a result, it may be in your best interest to seek aid when dealing with the IRS, which will not relent even if the original taxpayer is deceased.

What Is the Difference Between Estate Tax and Inheritance Tax?

In addition to addressing the deceased's tax obligation, heirs may have financial difficulties due to an inheritance. 

The IRS taxes inheritances in two ways: first, as a lump sum, and second, as a lump sum.

Inheritance Tax

An inheritance tax is a tax on receiving assets from a deceased person. 

In general, inheritance is not considered income for federal tax purposes; therefore, you do not need to declare it. However, depending on where you live, you may be taxed at the state level.

Estate Tax

Estate taxes are paid from the deceased's estate, whereas inheritance taxes are paid from the beneficiary's pocket. The federal government collects 40% inheritance taxes on estates worth more than $12.06 million. 

Depending on your specific situation, you may need to cover inheritance tax, estate tax, or both.

Do I Need to Save the Deceased’s Tax Documentation?

Since the IRS has the authority to audit a dead person's returns for up to 6 years after filing, it wants you to save any tax paperwork required to settle any financial or legal concerns that may emerge during the process. 

For instance, you should retain documents of the deceased's evidence of income, such as W-2s and 1099s.

The IRS may request verification for costs such as:

  • Medical expenses

  • Charitable contributions

  • Property taxes

  • Contributions to a retirement plan

Keep these documents for up to 7 years before shredding and disposing of them.

Even after 7 years, you may need clarification on whether trashing and discarding these materials are safe. Before doing so, you should speak with a tax specialist who can evaluate the records and assess if it is okay to get rid of them.

What Should I Know About Submitting a Final Tax Return?

If a person does not remarry during the year in which their spouse died, the IRS deems them to have been married for the whole year.

The living spouse may file as married filing separately or married filing jointly.

Unless the surviving spouse receives an extension, the tax return is due by the usual tax date in April.

Who Needs to Sign the Final Tax Return Form?

When filing online, the surviving spouse/representative needs to obey the software's instructions for the proper signature and inscription requirements. The filer should put the term “dead,” the dead individual’s name, and the date of passing on the top of paper returns. 

The following people should also sign the final tax return:

  1. Any authorized representatives 

  2. If no chosen representative is named, the surviving spouse submitting a joint return should fill out the form and put "filing as surviving spouse" in the signature field.

  3. If no designated representative is named and there is no living spouse, the individual in charge of the deceased individual's property must submit and sign the final tax return as a "personal representative."

What Are the Qualifications for a Widow or Widower?

Surviving spouses who have dependent kids may be entitled to file as a Qualifying Widow for 2 years following their spouse's passing. If they do not itemize deductions, this tax status permits them to take advantage of joint return tax rates, plus the largest standard deduction.

How Do I File Taxes for a Deceased Person Who Has No Estate?

Typically, the executor of an estate is responsible for filing taxes on behalf of the deceased. 

However, not everyone dies with an estate in place. 

A surviving family member should manage tax liabilities if no executor has been nominated. 

Nevertheless, the tax position might get complicated when there is no estate. 

If you are the representative of the deceased, you may be responsible for paying back taxes. It may be necessary to contact the IRS to get tax data dating back a few years to ascertain what is owed. 

Here are some of the various taxes that may have to be paid:

  • Federal income taxes

  • State taxes

  • Local taxes

  • Taxes on self-employment

  • Taxes on business

How to File a Deceased Person's Taxes Step by Step

To file a deceased person's taxes, simply follow the instructions outlined below.

Step 1: Contact the IRS and Collect the Required Info

When a person dies, their will is not automatically carried out. 

Beneficiaries receive their portion after going through a thorough probate process.

The initial stage in this process is to pay the deceased's taxes and obligations. This stage, however, needs you to have all of the deceased's account details.

If you don't have access to the deceased's records, you must seek them from the IRS. The IRS requires that anybody requesting such information be a close relative of the deceased. 

You'll need a few documents to confirm your relationship to access the deceased's financial records. In most circumstances, the IRS requests the following documents:

  • The deceased's name, SSN, and full address

  • A copy of the dead person's death certificate

  • A copy of the court's letter of testamentary granted to you

  • A copy of IRS Form 56 demonstrating your link to the dead

  • The deceased's tax returns report

Step 2: Decide on an Estate Administrator for the Deceased

As previously indicated, the dead frequently nominate the estate executor during their lives. 

However, you must also select an estate administrator to represent all of the deceased's assets. Only when you've chosen an estate administrator will you be allowed to deal with the taxes.

Estate administrators often include:

  • Close relatives

  • Spouses

  • Children

  • Siblings

An estate administrator has the following tasks once appointed:

  • Accounting for all of the deceased's assets, property, and money

  • Settling all of the deceased's debts

  • Claiming money that the deceased may have loaned to someone during their lifetime

  • Distributing the remainder of the assets to the beneficiaries in accordance with the law or the deceased's will

  • Filling out IRS forms 1040 and 1041 for all taxes and returns for the dead.

Step 3: Returning Money to Creditors

Once an estate administrator is appointed, they must begin by contacting all of the persons to whom the deceased owes money. You must notify all of your loved one's creditors of their death.

These creditors must then reply to the petition within three months with proof of claim. This evidence of claim will include the precise amount due by the deceased. This evidence of claim also includes documentation indicating that the sender loaned money to the dead.

Step 4: Filing Income Tax Returns for the Deceased

After you've paid back all of the deceased's debts, you must submit their final tax returns. 

The tax return process for a deceased individual is the same as for a live one. As a result, you must declare everything they earned up to their death on their tax return filing.

As an estate administrator, you must act with caution in this phase. Check to see if the deceased paid their taxes for past years. If they haven't, you must do it for them as well. 

Step 5: File Estate Income Tax Returns for the Deceased

Aside from the income tax, an estate administrator must also file a tax for the transfer of the deceased's inheritance to their heirs. There is also a tax on the revenue earned by the deceased's assets. 

Among these assets are:

  • The deceased's property

  • Investments in mutual funds

  • Stocks

  • Bonds

Step 6: Get Rid of the Federal Estate Tax Lien

In many circumstances, the heirs may choose to sell some of the property they have inherited. However, no one can sell the deceased person's property without the state's permission. 

The IRS frequently imposes a lien estate tax on the deceased's assets from the moment they die.

This lien tax prevents the deceased's heirs from selling any of the deceased's property until all taxes and obligations are paid. If you want to sell the deceased's property after you've paid all of the taxes, you must first discharge the lien.

The discharge procedure is straightforward. You simply need to fill out IRS Form 4422 to request a discharge lien certification. A copy of the deceased's will and any papers connected to the sale of the decedent's property must be included in addition to this form.

You may sell the deceased's property once the lien taxes are discharged without the IRS demanding anything from you.

Who Will Receive a Tax Refund from a Deceased Person?

If a deceased individual is eligible for a tax return, the refund will be sent to the deceased person's Executor or personal representative. They have been given permission to sign the check into the estate bank account. 

At that time, the money will be handled in the same manner as the rest of the cash in the estate.

How Can Trustworthy Help?

Nobody wants to think about what would happen if a deceased person owes taxes. However, this is a reality that you may face if a family member dies with unpaid IRS bills. 

Even if you regularly manage your own taxes without trouble, filing taxes after someone has died can be a difficult task. In fact, it is one of the most difficult tax circumstances a person may face. This is why having all of your deceased's estate planning documents in one place is crucial. 

At Trustworthy, we assist clients in completing any outstanding tax responsibilities left by loved ones by providing a cloud-based platform where all estate planning and tax documents can be stored and shared safely.

 Having all of your family's tax documents in one place helps you guarantee that no unfiled tax returns or outstanding obligations are overlooked. 

Click here to start your free 14-day trial today. 

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