If an individual owes taxes at the time of their death, the IRS will attempt to collect the tax debt from their estate. In situations where there is no estate, the IRS generally cannot collect the tax bill. However, if a joint return was filed with a spouse who has passed away, the surviving spouse will be responsible for the tax bill.
In general, a person without an estate is someone with little or no property to pass to heirs.
This can be a complex issue, compounded by grief and the extensive paperwork often accompanying the death of a loved one. LBS Tax extends their sympathies for such a loss. Contacting your local accountant, LBS Tax, can provide assistance with filing final returns, arranging tax debt payments, and addressing other tax issues. Meanwhile, here is an overview of the essentials.
A Decedent’s Final Tax Return
A final tax return must be filed if the deceased would have been obligated to file a return if alive. The surviving spouse or the estate’s representative can file the return.
For instance, if a senior citizen with only Social Security income dies, and no return is usually required, then no final return is necessary. Conversely, if a 50-year-old earning $100,000 per year dies mid-year, a final return must be filed due to the income exceeding the filing threshold.
What Happens to Income Earned After Death?
Income earned after death is sometimes considered income in respect of a decedent (IRD) and should be included in the final return. For example, a paycheck issued posthumously by an employer should be included in the final return. Income earned by the estate, such as rent from a property, should be reported on Form 1041, requiring the estate executor to obtain an EIN.
Who Is Responsible for the Tax on a Final Return?
If the final return indicates a tax liability or if the deceased owed tax debt, the estate pays the bill during probate, a process that settles debts and distributes remaining assets to heirs. For example, an executor might use funds from checking or retirement accounts to settle debts before distributing the remaining assets to heirs.
What If There Isn’t an Estate?
In cases where estates do not go through probate, typically because they are insolvent or assets pass outside of probate via beneficiary designations, debts usually remain unpaid. Some states don’t require probate for minimal assets, such as jointly-owned property or vehicles below a certain value.
What If a Joint Tax Return Was Filed?
If a joint return was filed with a deceased spouse, the surviving spouse remains responsible for the tax debt. For example, if a couple owed $20,000 from a 2020 return and were making payments, the surviving spouse is still liable for the remaining debt even after the spouse’s death.
If financial circumstances change, options like an offer in compromise or currently not collectible status may be explored. Filing separately in subsequent years may limit liability to individual returns rather than shared debts.
Dealing with Tax Debt After Someone’s Death
The spouse or estate executor should file necessary final returns, determine the deceased’s tax liabilities, and work with a tax professional to devise a payment plan. Without proactive measures, the IRS may pursue collection actions like wage garnishments or asset seizures.
Innocent Spouse Relief After the Death of a Spouse
In cases where tax debts were incurred due to the actions of a spouse, the surviving spouse may qualify for innocent spouse relief if unaware of the liabilities. Approval can absolve them of the deceased spouse’s tax portion.
Minimizing a Deceased Person’s Tax Liability
Efforts should be made to request penalty abatement, ensure all returns were filed correctly, claim allowable deductions, and consider an offer in compromise if full payment is not feasible.
Tax Liens After Death
Tax liens survive death and attach to estate assets. The estate executor can release the lien by paying the tax bill, or if assets are sold, the IRS is entitled to the proceeds.
FAQs About Deceased People’s Taxes
What happens if a deceased person owes taxes?
Their estate is responsible for the tax debt. If the debt is from a jointly filed return, the surviving spouse is responsible.
What happens to IRS debt after death with no estate?
If there is no estate, the deceased is considered insolvent, and typically no one is liable for the tax debts.
What if a deceased parent owes taxes with no estate?
Usually, no one is liable for the tax debt if there is no estate. However, existing tax liens may still be enforceable against assets.
What if a deceased parent owes back taxes?
The executor should use the estate to pay back taxes. If the estate is insolvent, taxes typically do not need to be paid. Inherited assets with tax liens can result in IRS claims on proceeds from their sale.
Get Help With Tax Issues with Your Local Accountant
Tax issues are always stressful, and the stress can be compounded by the loss of a loved one. Your local accountant at LBS Tax can help you understand obligations and deal with the IRS on behalf of the deceased or the estate. They also offer assistance with state tax issues.
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Contact us today for a full-service accounting firm that cares.