Tax Tips & Calculators

If a deceased family member would have been required to file a return for the year in which he or she died, , you must file a return on the deceased's behalf. Report income earned from the beginning of the year to the date of death on your deceased family member's final return.

To ensure all income the deceased earned is accounted for, a legal entity called an estate is automatically created at the time of death. Report on the estate return –, Form 1041 –, any income received after the date of death. This includes income earned from bank accounts or stock while the estate is in probate. The estate must request its own employer identification number (EIN) to use for filing purposes.

You or a personal representative should promptly notify all payers of income – including financial institutions – of your family member's death. This will ensure you report all income your family member's estate or heirs earn.

Many assets listing a beneficiary – like a life insurance policy or a brokerage account – can bypass probate and be paid directly to the beneficiary. Although the money paid out from assets that bypasses probate is usually not taxable, interest earned on these assets after the death of your family member is taxable.

Since the asset is paid directly to beneficiaries, interest is considered income in respect of a decedent (IRD) if both of these apply:

• It's interest the asset earns before it's paid out to beneficiaries.
• The interest isn't reported on the deceased's return.

Beneficiaries are responsible for reporting the IRD on their own returns.

If the deceased would have paid tax on income on amounts from these accounts, they're also IRD:

• Inherited IRA
• Retirement plan
• Annuity
• Certain other assets

Ex: Peter dies on April 15, 2011, and owns several assets:

• House he solely owns
• Cottage he co-owns with his sister Jane
• Bank accounts payable on death to his sister
• Mutual-fund account
• Life insurance policy listing his sister as beneficiary

The income earned from these assets should be reported as follows:

• On Peter's return: – income earned from his bank accounts and mutual fund until date of death
• On the estate return: – income the mutual fund earned after Peter's death and income from sale of house
• On Jane's return (since the assets will bypass probate):
  
  • Interest earned on bank accounts after Peter's death
  • Interest on Peter's life insurance policy after Peter's death
  • Income on the cottage if Jane sells it

Filing a Deceased Person's Return

If a family member dies before filing a return for 2011, the spouse or a personal representative might have to file and sign a return for that family member. A personal representative can be an:

• Executor
• Administrator
• Anyone in charge of the deceased family member's property

If the deceased doesn't owe taxes but had tax withheld, someone must file a return to get a refund. To prevent a processing delay, whoever files the return must enter this information across the top of the return:

• The word "Deceased"
• Deceased person's name
• Date of death

If your spouse died, you can file a joint return if:

• Your spouse died in 2011 and you didn't remarry in 2011.
• Your spouse died in 2012 before filing a return for 2011.

Your joint return should show both of these:

• Your spouse's income for the tax year earned until the date of death
• Your income for all of 2011

Enter "Filing as surviving spouse" in the area where you sign the return. If someone other than the surviving spouse is the personal representative, that person must also sign.

You shouldn't put the deceased's Social Security number on future returns after the year of death.

Death of a Dependent

You can claim a deceased family member as a dependent if both of these apply:

• The deceased lived in your home while alive.
• The deceased met all the requirements to qualify as a dependent.

Also, if the deceased dependent qualified you for these benefits, you can still claim the benefits in the year your dependent died:

• File as head of household or qualifying widow(er)
• Claim certain tax deductions or credits