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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2009
CCH Whole Ball of Tax
is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com

Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation/Briefings.

 
2009 CCH Whole Ball of Tax
Release (16) | Back to WBOT

2009 CCH Whole Ball of Tax

Contact: Leslie Bonacum, 847-267-7153, mediahelp@cch.com
Neil Allen, 847-267-2179, neil.allen@wolterskluwer.com

Lives End, But Taxes Live On

(RIVERWOODS, ILL., January 2009) – It’s a sad fact, but death does not bring down the curtain on taxes, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

People can be taxed on income they receive right up to the dates of their deaths. Then, in the eyes of the tax law, a new tax entity – the estate – is created whenever someone dies. Just like the decedent, the estate may receive income, have expenses and deductions and have to file an income tax return, which is done on IRS Form 1041. Estates pay the debts of the deceased and are eventually distributed to heirs and other beneficiaries, and when all debts have been settled and all assets distributed, they go out of existence.

You may have a role in the deceased’s taxes if you’re named executor in the deceased’s will, appointed personal representative by a court, or simply step into the role, perhaps as a surviving spouse or child. You may hire a professional to help you with taxes – with the professional paid out of estate funds – or take on the task yourself.

“If you feel comfortable doing your own taxes, and the decedent’s tax situation is not overly complicated you may wish to take on preparing a final return for a decedent on the familiar Form 1040 or the income tax for the estate on Form 1041,” said CCH Senior Estate Tax Analyst Bruno Graziano, JD. “But even if you don’t want to handle the taxes yourself, you should understand the process involved, since as executor or personal representative you must sign the return and the IRS will ultimately hold you responsible for it.”

Federal Estate Tax Usually Not an Issue

One thing survivors rarely have to worry about is the federal estate tax.

“People assume that since there’s something called an estate, the federal estate tax must be due,” Graziano said. “In fact, the federal estate tax applies to a small fraction of estates and it’s a tax on the amount being transferred to heirs and other beneficiaries. For 2008, it applies only to estates of $2,000,000 and up, increasing to $3,500,000 for 2009, and it almost always falls to a professional to figure and file the tax. On the other hand, a final return for the decedent usually does have to be filed and even a modest estate may owe income tax.”

Acting As a Fiduciary

A surviving spouse can jointly file the decedent’s tax return if he or she wishes. Otherwise, the final return will be filed by the personal representative, executor or administrator, who will also be responsible for the income tax return of the estate.

Whether you are a surviving spouse or another personal representative tackling tax issues, a good first step is to get IRS Publication 559: Survivors, Executors and Administrators. This publication covers the most important topics surrounding the final return of the decedent and the income tax return for an estate, including comprehensive examples of a final Form 1040 and Form1041.

If you’re acting on behalf of the estate, whether your title is executor, administrator or personal representative, you are a “fiduciary” in the eyes of the IRS. You should obtain an employer identification number, or EIN, for the estate (even though the estate has no employees). You can do this by filing a paper Form SS-4, by calling the IRS at 800-829-4933 or by going online at IRS.gov, although there are “blackout” periods for online application.

The EIN is used for filing tax returns but should also be sent to organizations such as banks, brokers and mutual funds so that interest, dividends, and so on will be sent to the estate of the deceased and the income will be reported to the IRS that way, as well.

Once you have an EIN for the estate, you also will probably want to file IRS Form 56, which informs the IRS that you’ll be acting as fiduciary for the estate. You can use the same form later on when the estate is wrapped up and your fiduciary responsibilities are over or if someone else is appointed fiduciary.

A Series of Tax Returns

A number of tax returns normally have to be filed following a death. If someone dies before the income tax return for the prior year was filed, the first task is to file that return. All of the normal tax rules apply, but the death should be noted on the return by writing “deceased” and the date of death next to the deceased’s name at the top of the form.

A surviving spouse or court-appointed personal representative can claim any refund due. Otherwise, a Form 1310 has to be filed so that the check can be made out to the fiduciary for the decedent’s estate. If a refund check for a prior year has already been sent by the IRS, a surviving spouse can return it with Form 1310 and receive a new check in his or her own name.

“The return is due on the normal filing date, but an automatic six-month extension of time to file is available,” Graziano noted.

The Final Return of the Decedent

Assuming that federal estate tax is not an issue, the next return will be the decedent’s final return, for the year of death. This will also be done on an ordinary Form 1040, due April 15 of the year following the death for calendar year taxpayers.

The final return accounts for the decedent’s income, deductions and credits for the year of death, but only up to the date of his or her death. If the decedent was married, this can be done on a joint return filed by a surviving spouse, on his or her own behalf, assuming the spouse has not remarried by the end of the year of death and that no personal representative has been appointed by a court. A court-appointed personal representative has the option of signing on to a joint return with a surviving spouse or filing the final return for the decedent as “married filing separately.”

Income Tax Returns of the Estate

The first income tax return for the estate will cover the portion of the year that begins the day of the decedent’s death, and it is due on the same filing date as the final return – April 15 of the year following the year of death for calendar-year filers. Form 1041 is used for the return.

Income that is owed to the deceased, but not paid before death is called “income in respect of the decedent.” This term is used to describe such items as unpaid salary or a bonus due an employee or distributions from a company retirement account or IRA

Income tax returns for the estate must continue to be filed as long as the estate receives gross income of $600 or more in a year, which is the exemption amount for estate income returns. Tax brackets for income accumulated in an estate or trust begin at 15 percent, rather than 10 percent for individuals, and reach a top rate of 35 percent at the relatively low level of $10,700 for 2008 returns, $11,150 for 2009 returns.

“Generally, it’s in everyone’s interest to distribute items that produce income to heirs and beneficiaries as soon as possible, since the income will be taxed at a lower rate once it’s in their hands,” Graziano noted.

Note that some items do not pass through the estate. The proceeds of life insurance policies, for example, are normally paid directly to the beneficiaries.

Sorting Out Income, Deductions, Credits

From a tax point of view, a major task of the fiduciary is to keep track of income, deductions and credits as they accrue to the estate and as income and assets are distributed to beneficiaries.

For example, suppose your uncle, who was single, owned rental property that generated monthly income. Your uncle dies in June, 2009, before receiving the June rent payment. You receive the property as an inheritance in July, 2010, and receive the first rent payment that month. The rental income for January through May of 2009 is reported on your uncle’s final return, as are deductions such as real estate taxes for that period. The rental income from June 2009 to June 2010 is reportable on the returns of the estate for 2009 and 2010, and the applicable deductions are reported on those returns as well. On your tax return for 2010, you report any rental income you receive from July until the end of the year.

Sometimes, income of the estate will be distributed to beneficiaries without a distribution of the assets that produce the income. In that case, the estate reports the distribution on Schedule K-1 of Form 1041 and can take a deduction for the income on its own income tax. For tax purposes, the distribution is characterized as coming pro-rata from the various sources of income in the estate. For example, if 30 percent of the estate’s income is in the form of dividends, then 30 percent of any distribution will be considered to consist of dividends and taxed accordingly.

Special rules apply to some deductions that are passed along to individuals, so it pays to consult the IRS guidance or a tax professional to make sure they are properly applied.

Special Tax Treatment for Surviving Spouses

For a limited time following the death, a surviving spouse is entitled to special treatment under the tax laws.

The surviving spouse not only can file jointly with the decedent for the tax year in which death takes place, but can use the tax rates and other tax benefits of joint filers for the two succeeding years providing he or she remains unmarried.

The surviving spouse can also claim the joint filer’s $500,000 exclusion of gain on sale of a principal residence – instead of the $250,000 exclusion for single filers – if the sale takes place within two years of death and he or she is still single.

“This is a new provision, effective in 2008,” Graziano noted. “It used to be that the sale had to take place in the year of death, which could place an undue strain on the newly widowed spouse to decide whether or not to sell, and to arrange the sale with the clock ticking.”

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® TeamMate, CorpSystem®, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services globally for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion ($4.8 billion), maintains operations in over 33 countries across Europe, North America and Asia Pacific and employs approximately 19,500 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. For more information, visit www.wolterskluwer.com.

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