Are you tasked with the job of filing the final income tax returns for a loved one or friend who has passed away? Whether appointed by a court or asked by the person in question, your job is to help finalize their financial obligations and allow everyone to begin moving forward. But what do you need to know about filing a final return? Here are a few key points to make the process easier.
1. A Spouse Can Generally File
If the deceased person was in a relationship that allowed them to file as Married Filing Jointly, their partner may generally file and sign the final return. As a general rule, all aspects of the shared return would remain the same as if both partners were still alive, including a full standard or itemized deduction.
2. The Personal Representative Is Responsible
If the one who passed away isn't filing jointly, then the personal representative must arrange for the forms to be completed. Unless you are experienced in more complicated tax matters, you do well to have a tax preparer help with this. If you do pay for the service, the preparer will sign the return. If someone helps out for free, they will not need to sign the return.
3. There Is a Cutoff
One of the most challenging aspects of a final return is understanding where to cut off the income and expenses for the final return. In general, the person's tax year is considered as having ended on the day they passed away. So, a taxpayer who normally filed under the 'cash method' of accounting would have included paychecks received up until the date of their death. Salary received after this date would not be on this return. You'll need to determine the dates that any income or expenses were accrued as well as when they were paid.
4. Pass on Income in Respect
What do you do with income or expenses that are not placed on the final return? This becomes 'income in respect of a decedent', reported on the income tax forms of those who received that income. If the person's child received the proceeds from a sale negotiated before the death, for example, the child would include both the sale profits and expenses related to it. You'll want to give this information to any beneficiaries and heirs for their purposes.
5. An Estate Return May Be Needed
Technically, all estates are subject to the estate tax. However, the annual exemption is quite high, so you may not need to file this return. Check with your tax preparer about this form. If it is needed, you'll want to gather information from the final return as well as asset and expense records for everything available on the date of your friend's passing.
Handling the tax matters of a deceased individual can be complicated, but it is made easier when you have professional assistance. Start today by consulting with an experienced tax preparation company in your area.
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