Filing the Final Tax Return for Someone Who Has Died

In the months after a death, taxes are the last thing anyone wants to think about, and yet the paperwork keeps arriving: a W-2 from the last employer, 1099s from the bank and the brokerage, a Social Security statement. Someone has to file the final return, and a few things about that return are different from every one that came before. This is what families in Weatherford and Parker County most often need to know.

The final return still has to be filed

A person's final individual income tax return covers the period from January 1 through the date of death. It is filed on the same form as always, by the same deadline as everyone else's return for that year, and it reports the income the person received up to the date they died. Income that arrives after that date, such as a final paycheck issued later or interest that accrues afterward, generally belongs to the estate or to the person who inherits the asset, not to the final individual return.

The word "Deceased," the person's name and the date of death are written across the top of the return. If the return is filed electronically, the software handles that notation.

Who signs it

If there is a court-appointed personal representative, that person signs the return and includes a copy of the appointment. If the person was married, the surviving spouse can file a joint return for the year of death and signs it as the surviving spouse. If there is no representative and no spouse, the person handling the affairs, often an adult child, signs as the person in charge of the decedent's property.

When the final return shows a refund and the person claiming it is not the surviving spouse filing jointly or a court-appointed representative, a separate form is attached to establish who is entitled to receive the refund. Missing that form is the most common reason a deceased person's refund is delayed.

What changes for a surviving spouse

For the year of death, a surviving spouse can still file jointly, which usually produces the best result. For the following two years, a surviving spouse who has a dependent child living at home and has not remarried may be able to use the qualifying surviving spouse status, which keeps the joint-return tax treatment for a while longer. After that, the spouse files as single or head of household, depending on the household.

This change in filing status is the reason many widows and widowers are surprised by the following year's return. The same income taxed under single rates produces a noticeably different result, and withholding set up years earlier often no longer fits. We walk through the options in Choosing Your Filing Status.

When the estate needs its own return

An estate is a separate taxpayer. If assets held in the person's name continue to earn income after death, such as interest, dividends, rent or a gain from selling property, and that income crosses a modest filing threshold, the estate files its own income tax return. The estate gets its own taxpayer identification number for this, obtained from the IRS, and the return runs from the date of death until the assets are distributed.

This is different from the federal estate tax, which is a tax on the value of what a person owned at death. That tax applies only to very large estates and is not something most families ever encounter. The estate income tax return, on the other hand, is routine whenever an estate takes more than a few months to settle.

Inherited assets and basis

Most property inherited from a decedent takes a new basis equal to its value at the date of death. For heirs, this is often the most valuable rule in the whole process, because it means a house or a piece of land that appreciated over decades can be sold shortly after death with little or no taxable gain. Getting a written valuation as of the date of death is what makes that work, and we explain why in Inherited Property and the Stepped-Up Basis.

Retirement accounts are the exception. An inherited IRA or 401(k) does not get a new basis, and withdrawals by the beneficiary are generally taxable income under rules that depend on who inherited it and when.

Documents to gather

• All W-2s and 1099s issued in the person's name, including those that arrive the following January
• The prior year's return, which shows what accounts and income sources to expect
• Letters testamentary or the court appointment, if there is one
• Date-of-death statements from each bank, brokerage and retirement account
• A valuation of any real estate as of the date of death
• Records of medical expenses paid in the final year, which can be significant

Texas is simpler on one point

Texas has no state income tax and no state inheritance tax, so there is no state-level final return and no state-level tax on what heirs receive. Property tax exemptions on the family home, however, do not transfer automatically. A surviving spouse or an heir who lives in the home should contact the appraisal district to update the homestead exemption, a step we cover in The Texas Homestead Exemption.

We help families across Weatherford, Granbury and Mineral Wells through final returns and estate filings every year, and the process is much easier when someone calls before the first deadline rather than after.

This article is general information, not tax advice. Filing thresholds, estate rules and beneficiary rules change, and the right steps depend on how the person's assets were held.

Handling a family member's final return? Call RD Precision Tax Service in Weatherford at (817) 480-6649, or request a free estimate. We will tell you exactly which returns are needed and which are not.