Tax Thoughts When a Loved One Passes Away (Part 2)

If you become an executor of a loved one who passes away, you may have some important tax decisions to make. Here are some quick thoughts.

Choose Tax Treatment for Decedent’s Medical Expenses

The decedent’s medical expenses provide you with planning opportunities to

deduct as itemized deductions (subject to the 7.5 percent floor) not only the medical expenses incurred during the taxable year of death, but also those unpaid at the date of death but paid within one year of death; or
deduct in full (no floor) the medical expenses paid after the date of death against the federal estate tax.

You, as the executor, may need to file

the decedent’s final Form 1040,
the estate’s Form 1041 income tax return, and
the estate’s Form 706.

Note. For additional final Form 1040 considerations, see Part 1 of our analysis at Tax Thoughts When a Loved One Passes Away (Part 1).

File Estate’s Federal Income Tax Return (Form 1041)

You, as the executor, are also responsible for the estate’s federal income tax return. After the decedent has passed away, income generated by his or her holdings now belongs to the estate, and that income does not escape the clutches of good ol’ Uncle Sam.

The estate’s initial federal income tax year begins immediately after the decedent’s death. The tax year-end can be December 31 or the end of any other month that results in an initial tax period of 12 months or less.

File the return on Form 1041 (U.S. Income Tax Return for Estates and Trusts). The due date is the 15th day of the fourth month after the tax year-end (adjusted for weekends and holidays). So, for a decedent who died in 2020, the filing deadline for the estate’s 2020 federal income tax return is April 15, 2021, assuming you choose the standard December 31 tax year-end for the estate.

real property that is owned by joint tenants with right of survivorship,
qualified retirement plan accounts and IRAs that have designated account beneficiaries, and
life insurance death benefits that are paid directly to designated policy beneficiaries.

If the estate is valued at $11.58 million or less and the decedent did not make any sizable gifts before death, you don’t have to file Form 706. But even if you don’t have to file Form 706, you may want to file it anyway to preserve the portability election.

Takeaways

The decedent’s medical expenses provide you with planning opportunities to deduct as itemized deductions (subject to the 7.5 percent floor) not only the medical expenses incurred during the taxable year of death, but also those unpaid at the date of death but paid within one year of death; or deduct in full (no floor) the medical expenses paid after the date of death against the federal estate tax.

You, as the executor, may need to file the decedent’s final Form 1040, the estate’s Form 1041 income tax return, and the estate’s Form 706.

You won’t need to file Form 1041 when all the decedent’s income-producing assets bypass probate and go straight to the surviving spouse or other heirs by contract or by operation of law—assets such as real property that is owned by joint tenants with right of survivorship, qualified retirement plan accounts and IRAs that have designated account beneficiaries, and life insurance death benefits that are paid directly to designated policy beneficiaries.

The important federal tax considerations explained in this article and in the Part 1 article can apply when a loved when passes away, so pay close attention—especially if you are the executor.

If you have questions about a loved one that passes away, please call me on my direct line at 509-543-7600.

January 2021

This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. TaxMedics does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. Please contact us directly to discuss how this information may be used based on your actual facts and circumstances.