What’s more certain than death and taxes?
Maybe taxes after death?
“Unfortunately, death does not relieve us of our tax obligations,” says Dave Du Val, an enrolled agent and vice president of customer advocacy at TaxAudit.com, TurboTax’s exclusive audit defense service provider. “If we owe taxes in the year we die, the government still wants what they consider their fair share. And if we have tax returns we never filed, they want those filed too, along with their money. On the flip side, if you have a refund due the year you die, your estate can still claim it.”
[See: Answers to 7 Burning Tax Questions.]
It can get even more confusing, Du Val says. “If the deceased earned money throughout the year in which death occurred — for example, interest, dividends, sale of assets — two returns could be required; the Form 1040 series for income before death, and for that year after date of death, an estate return, Form 1041.”
So if you find yourself in the unenviable situation of having to file taxes for a deceased spouse, parent or another family member or friend, keep the following in mind.
You may not have the authority to file the taxes. You want to make sure, says Bill Farmer, an enrolled agent who owns HTI Tax Service in Lexington, Kentucky. He has prepared tax returns for several deceased taxpayers, including his own parents and grandmother.
“Filing the tax return is not a challenge,” he says. “It files pretty much like any other tax return.”
But he says that you do want to make sure you’re legally authorized to act on behalf of your loved one.
“It doesn’t matter that you have their power of attorney; that dies when the person dies,” Farmer says. “You must be appointed by a judge as the executor, executrix, administrator or whatever the appropriate title is.”
And how do you find that judge? Farmer suggests you try your district court and notes that his state’s website, for example, has fill-in-the-blank PDF forms online that you can print out, to help you receive permission to file.
From what Farmer has found, at least in Kentucky, “The process is straightforward if you follow the instructions and don’t try to overthink things.”
[See: 9 Red Flags That Could Trigger a Tax Audit.]
Find someone qualified and reputable to do the taxes. It’s hard enough doing your own taxes and many people, of course, don’t. It’s something else entirely doing somebody else’s taxes, especially if your loved one left quite a paper trail of gains and losses in his or her life.
Or, here’s a more realistic example: If you’re doing your parent’s taxes, and he or she bought savings bonds years ago and the rights of survivorship aren’t listed on the bonds, that can get sticky, according to J. Keith Baker, who teaches personal finances classes and is a professor of mortgage banking at North Lake College in Irving, Texas.
In that case, the savings bonds would belong to his or her estate, Baker says, and then once the bonds were cashed in, “the interest on them that has been tax-deferred must be paid and put on the final return.”
So you’re certainly doing a smart thing by finding a tax professional but choose one wisely, especially if you’re in a hurry and are still emotional over your loved one’s death, says Doug Stives, a certified public accountant and a professor of accounting at Monmouth University in West Long Branch, New Jersey.
“Select professional advisors very carefully since some are vultures and will create problems and unnecessary expenses for grieving families,” he says.
And you may want to select someone to do the taxes sooner rather than put it off for too long.
“Some states still have inheritance taxes, and some will give you a sharp break on your tax rate if you file the return early — you can save 5 percent by filing and not by waiting another six months,” Baker says.
You’re going to need to gather a lot of paperwork. You probably guessed this already.
But one piece of paperwork everyone will need, Farmer says, is the death certificate.
“Every financial institution will want an original along with your court appointment,” he says. “Make copies of both documents and carry the originals with you to show anybody who wants to see the document. Hand out copies, not your original.”
But there’s more to do, of course. Farmer says that you’ll want to have three to five years of the deceased’s previous tax returns.
“The returns tell you what the person has reported previously and hopefully what assets might have been disposed of along the way. Knowing where people are receiving their income is vital,” he says, explaining: “No executor wants a letter in two years telling them that there is underreported income.”
Still, once the process gets moving, filing and receiving a refund is basically pretty standard, says Steven Packer, a CPA with the Tax Accounting Group of Duane Morris LLP in Philadelphia. And yet there are some quirks, which is why he, like many tax experts, recommends hiring a professional.
For instance, as Packer points out, “If a refund is due, that refund must be claimed via Form 1310, Statement of a Person Claiming Refund Due a Deceased Taxpayer.”
“This form has some complexities,” he adds.
[See: 9 Scary Things Consumers Do With Their Money.]
And another reason to hire someone to help you and to be careful in general with your loved one’s taxes: If you make a mistake, from not filing at all to filing taxes without the proper documents, “You can be held personally liable,” Baker says.
So, yes, even though your loved one hopefully won’t haunt you after death, the Internal Revenue Service might.
On the bright side, if that happens, perhaps someday when you visit your loved one’s gravesite, you will share your tale of woe with the IRS, and in spirit, anyway, you will both laugh about all of this.
But probably not.
More from U.S. News
13 Money Tips for Married Couples
How to File Final Taxes for a Deceased Loved One originally appeared on usnews.com
