Final Income tax Return due to death

Question

If a person dies in 2023 and he has significant income in 2023 he has to file an income tax return. Would that income tax return cover the entire year or would it just cover Jan 1 to the date of death? Could it be done either way?

Answer 1

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Income Taxation At Death

Final Income Tax Returns Of Decedents

The return covers income from the start of the tax year (usually, but not always the calendar year, other elections are possible) until the date of death for the decedent who is unmarried at the time of death or does not file a joint tax return in the final return at death. It is usually reported on IRS Form 1040 for the decedent and prepared by their executor or personal representative.

When the final return is a joint income tax return filed, usually on IRS Form 1040, by a surviving widow or widower, it includes the decedent's income from the start of the tax year to the date of death, and the widow or widowers income for the entire year (assuming that the survivor lives through the end of the tax year, if not, it is filed by the surviving spouse's executor or personal representative and includes the income through date of death for each spouse).

Note that sometimes in addition to a final income tax return, income tax returns for years during which a decedent was alive the whole year have also not been filed on the date of death. In those cases, income tax returns for those years have to be filed as well as the income tax return for the year of death.

For example, suppose that someone died on September 2023 after having received an extension of time until October to file their 2022 income tax return, and this person earned substantial income in 2022 and 2023. Then, the executor or personal representative or surviving spouse needs to file a final tax return for all of 2022 and another final tax return for the partial year of 2023.

Income Taxes On Estates

Income earned after the date of death from a decedent's assets or contract rights is reported on the estate tax return (IRS Form 1041).

These returns must be filed until the decedent ceases to earn income in the decedent's name or the name of the decedent's estate, possibly for decades in the case of estates where there is a large continuing royalty income that is not assigned to someone else, for example.

Income In Respect Of A Decedent

Income earned before the date of death but received after the date of death is called income in respect of a decedent and is reported on the income tax return of the first person to receive that income after the date of death.

Examples of income in respect of a decedent (IRD) include tax deferred retirement account income, and income from a job where the work is done before death and the payment arrives after death for some reason.

Capital Gains Taxation At Death

But, keep in mind that unrealized capital gains in property at death are not taxed even if the property is later sold at a price in excess of its pre-death basis for capital gains tax purposes (i.e. for more than its purchase price, less depreciation, plus capital improvements, plus certain other adjustments especially in pass though entity ownership interests).

Property sold after death is taxed at the sales prices less fair market value as of date of death plus or minus post-death adjustments to capital gains tax basis (with certain losses which would have been gains but for the death disallowed).

State and Local Income Taxes

Note that all of the above pertains to federal income taxes (often there would be final state and local income taxes as well).

Footnote On Transfer Taxation

There is a separate tax called the "federal estate tax" that is due on some high net worth people when they die based upon their net worth at death with various exemptions and adjustments that is filed on IRS Form 706 within nine months of the date of death unless an extension of time is obtained. For an individual who has made no gift taxable gifts prior to death, the first $12 million or so of net worth is exempt from estate taxation on Form 706.

Federal estate taxation on Form 706 is completely different from Federal income taxation of estate on Form 1041, which is an income tax, just like Form 1040, but for dead people.

The Federal Estate Tax is part of a group of "transfer taxes" that also includes the Federal Gift Tax (on certain large gifts made during life) and the Federal Generation Skipping Transfer Tax (which imposes additional taxes in lieu of gift and estate taxes on transfers made to grandchildren or more remote descendants in an effort to reduce gift and estate taxes). Sometimes the death of a person will trigger a generation skipping transfer tax liability for a trust of which the decedent was a beneficiary prior to death under complicated rules beyond the scope of this answer.

State inheritance taxes used to be common in addition to the federal estate tax, but all or all but a handful of state have now abolished them.

Answer 2

An income tax return is owed based on income and deductions up to the date of death, and not the entire year. This publication provides information for the broader question of taxes and death, which is relevant to questions about income earned but not received. It also includes information on estate income taxes, relevant for the period time of death to final distribution. Therefore, two (or more) separate tax returns might be owed.