The Internal Revenue Service (IRS) requires the executor of an estate to file a tax return on behalf of a deceased individual for the tax year in which the the person died. Any tax the decedent owes is paid out of the estate. Once the tax debt is satisfied, no further tax is due on behalf of the deceased.
Estate Liable for Taxes
When a taxpayer dies, his assets become part of his estate. The estate consists of all money, property, assets, outstanding wages, retirement income, balances in bank accounts, dividends, interest, annuities and stocks. Personal property solely owned by the decedent can also be included as part of the estate.
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If the deceased taxpayer owes taxes, funds in his estate are used to pay off the existing debt. Generally, the person managing the estate will endeavor to pay the tax liabilities from liquid assets such as cash in bank accounts. However, they may need to sell assets and property in order to meet a significant tax bill.
Executor Pays Taxes for Deceased
Upon death, an executor is appointed to manage the estate. The executor or executors will be named as such in the deceased's will. In most cases, the decedent's surviving spouse or children are legally granted the right to serve as executor of the estate.
If there is a controversy over who the decedent's legal executor should be or if the decedent does not have an executor, the court will appoint one. The executor's responsibility is to ensure that the decedent's taxes are paid in full.
Filing Taxes for a Deceased Person
The executor is responsible for filing a tax return on behalf of the deceased individual and paying all taxes that are due. In most cases, the executor will use Form 1040 to report income on behalf of the deceased. This is separate to the estate taxes which may require an additional tax return if more than $600 in income is generated.
Consider also: Form 1040: What You Need to Know
If the decedent has a joint-filing surviving spouse, she must sign the deceased's tax return. If the decedent has an executor of the estate other than a surviving spouse, the executor must sign the return on behalf of the deceased. The IRS recommends writing the word "Deceased" and the date of death at the top of the tax return.
Tax Is Paid or Forgiven
If the deceased individual's tax return shows that he owes tax, the executor is responsible for ensuring that the tax is paid. For a spouse filing jointly, she can pay the tax when she files the tax return since the IRS allows her to file jointly in the year her spouse dies. The IRS can audit the estate tax return at any time and can pursue the estate for taxes owed for up to 10 years.
Consider also: Tax Audits: What Are They, Why Are You Audited & IRS Audit Outcomes
If the decedent has no income in the estate to pay the tax or if the decedent died from injuries sustained while performing military service, the IRS usually forgives any owed tax.
Neither an executor or the beneficiaries are responsible for paying the decedent's tax out of pocket if there is no money in the estate. If the estate is technically bankrupt, then the taxes will simply not be paid.