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Chapter 4. Decedents

Introduction

This chapter discusses the tax responsibilities of the person(s) who is in
charge of the property of a decedent (person who died). It covers the
following topics:

∙   What income tax return(s) must be filed

∙   Who must file the return

∙   When and where the return must be filed

∙   Who must pay any tax that is due

∙   What income tax, if any, a survivor owes on property inherited from a
    decedent

This chapter does not discuss the requirements for filing an income tax return
of an estate (Form 1041). For information on Form 1041, see Income Tax Return
of an Estate - Form 1041 in Publication 559, Tax Information for Survivors,
Executors, and Administrators. This chapter also does not discuss the
requirements for filing an estate tax return (Form 706). For information
on Form 706, see Publication 448, Federal Estate and Gift Taxes.

Related publication and forms.

This chapter refers to a publication and some forms that you may need.
The list of forms does not include Forms 1040, 1040A, and 1040EZ. For
more information, you may want to order the following:

    Publication 559, Tax Information for Survivors, Executors, and
    Administrators

    Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer

    Form 4810, Request for Prompt Assessment Under Internal Revenue Code
    Section 6501(d)

Personal Representatives

A personal representative of an estate can be an executor, an administrator,
or anyone who is in charge of the decedent's property. For simplicity, the
term personal representative will be used throughout this chapter.

The surviving spouse may or may not be the personal representative, depending
on the terms of the decedent's will or the court appointment.

Generally, an executor (or executrix) is named in a decedent's will to
administer the estate (property and debts left by the decedent) and distribute
properties as the decedent has directed. An administrator (or administratrix)
is usually appointed by the court if no will exists, if no executor was named
in the will, or if the named executor cannot or will not serve. In general,
an executor and an administrator perform the same duties and have the same
responsibilities.

For estate tax purposes, if there is no executor or administrator, then the
term executor includes any person who has actual or constructive possession
of any property of the decedent.

Duties. The primary duties of a personal representative are to collect all of
the decedent's assets, pay the creditors, and distribute the remaining assets
to the heirs or other beneficiaries.

The personal representative for the decedent must also do the following:

∙  Notify the Service that he or she is acting as the personal
   representative,

∙  File any income tax return that is due, and

∙  Make sure that any income tax that is due is paid.

For more information on the duties and responsibilities of the personal
representative, see Duties under Personal Representatives in Publication 559.

Final Return for the Decedent

The same filing requirements that apply to individuals (income, age, and
filing status) determine if a final income tax return must be filed for the
decedent and whether Form 1040, Form 1040A, or Form 1040EZ should be used.
Filing requirements are discussed in Chapter 1.

If none of the filing requirements are met, but the decedent had tax withheld
or paid estimated tax, a final return should be filed to get a refund. A final
return should also be filed if the decedent was entitled to a refundable
credit such as the earned income credit. See Chapters 35 and 36 for additional
information on refundable credits.

Methods of accounting. The method of accounting used by the decedent generally
determines what income you must include and what deductions you may take on
the final return. Generally, there are two methods of accounting, cash and
accrual, which individuals use.

Cash method. If the decedent used the cash method of accounting, which
most people use, you should show only the items of income that the decedent
actually or constructively received before death, and you should deduct only
the expenses the decedent paid before death. There is an exception for certain
medical expenses not paid before death. See Medical costs, later, under
Deductions.

Accrual method. If the decedent used an accrual method of accounting, you
should show only those items of income that the decedent would have accrued,
or earned, before death. You would deduct those expenses the decedent was
liable for before death, regardless of whether the expenses were paid.

Additional information. For more information on the cash and accrual methods,
see Accounting Methods in Chapter 1.

Who must file the return? The personal representative of the decedent is
responsible for filing any income tax returns and making sure that any income
tax that is due is paid. This includes the final income tax return of the
decedent (for the year of death) and any returns not filed for preceding
years.

Example. Roberta Russell died on February 5, 1993, before filing her 1992 tax
return. Her personal representative must file her 1992 tax return as well as
her final tax return for 1993.

Under certain circumstances, a surviving spouse may be able to file a joint
final return or joint returns for preceding years for which returns have not
yet been filed. See Joint return, later.

Filing the return. When you file a return for the decedent, either as
the personal representative or as the surviving spouse, you should write
"DECEASED," the decedent's name, and the date of death across the top of
the tax return. This same information should be included on any Form 1040X,
Amended U.S. Individual Income Tax Return, that you file for the decedent.

If the decedent and surviving spouse are filing a joint return, you should
write the name and address of the decedent and the surviving spouse in the
name and address space. If a joint return is not being filed, write the
decedent's name in the name space and the personal representative's name
and address in the remaining space.

Signing the return. The personal representative must sign the return. If a
joint return is filed, the surviving spouse must also sign it. If no personal
representative has been appointed by the due date for filing the return, the
surviving spouse (on a joint return) should sign the return and write in the
signature area "Filing as surviving spouse." See Joint return, later.

Claiming a refund. Generally, a person who is filing a return for a decedent
and claiming a refund must file Form 1310, Statement of Person Claiming Refund
Due a Deceased Person, with the return. However, if you are a surviving spouse
filing a joint return with the decedent, you do not have to file Form 1310.
If you are a court appointed or certified personal representative filing Form
1040, Form 1040A, or Form 1040EZ for the decedent, you also do not have to
file Form 1310, but you must attach to the return a copy of the court
certificate showing your appointment.

Example. Joe Brown died on January 14, 1993, before filing his 1992 tax
return. On April 3, 1993, you are appointed the personal representative for
Joe's estate, and you file his Form 1040 for 1992 showing a refund due. You
do not need to attach Form 1310 to claim the refund, but you must attach to
his return a copy of the court certificate to show that you are the appointed
personal representative of Joe's estate.

When and where to file. The final return is due by the date the decedent's
return would have been due had death not occurred. The final return for a
calendar year taxpayer is generally due by April 15th of the year following
death. However, when the due date for filing tax returns falls on a Saturday,
Sunday, or legal holiday, you may file on the next business day.

You can mail the decedent's final income tax return to the Internal Revenue
Service Center for the area where you live. See Where to File at the end of
this publication. If you prefer, you may hand carry the return to any IRS
office within the district for the area where you live. Consult your local
phone directory for these locations.

Request for prompt assessment of tax. As the personal representative for
the decedent's estate, you must see to it that any additional taxes that
the decedent may owe are paid. The IRS usually has 3 years after the filing
of a return to assess (charge) any additional tax that may be due. Returns
filed before the due date are treated as filed on the due date.

You can shorten the time that the IRS has to charge the decedent's estate
any additional tax by requesting a prompt assessment of the decedent's income
taxes. This request reduces the time the IRS has to charge any additional tax
from 3 years from the time the return is filed to 18 months from the date the
IRS receives the request. This may permit a quicker settlement of the tax
responsibilities of the estate and earlier distribution of the decedent's
assets, such as money and property, to the beneficiaries.

You can make the request for any open tax years for the decedent, even though
the returns were filed before the decedent's death. An open year is one which
is still subject to additional tax charges (generally 3 years after the filing
of a return or after the return's due date, whichever is later).

Note. Requesting this prompt assessment will not extend the time the IRS has
to charge any additional tax beyond the 3 years from the date the return was
filed or due.

You can use Form 4810, Request for Prompt Assessment Under Internal Revenue
Code Section 6501(d), for making this request. If Form 4810 is not used,
you must clearly indicate that you are requesting a prompt assessment under
Section 6501(d) of the Internal Revenue Code and specify the year(s) involved.
You must file the request separately from any other document. Send it to the
IRS office where the decedent's return was filed.

Joint return. Generally, the court appointed personal representative and the
surviving spouse may file a joint return for the decedent and the surviving
spouse. However, the surviving spouse alone may file the joint return if no
personal representative has been appointed before the due date for filing the
return. This also applies to the return for the preceding year if the decedent
died after the close of the tax year and before the due date for filing that
return.

If the surviving spouse remarried before the end of the year in which the
decedent died, a final joint return with the deceased spouse cannot be filed.
The filing status of the deceased spouse is then married filing separately.

Change to separate return. If the surviving spouse files a joint return with
the decedent and a personal representative is later appointed by the court,
the personal representative may change the joint return filed by the surviving
spouse. The personal representative has one year from the due date of the
return to file a separate return for the decedent. The joint return that
the surviving spouse had filed would then become the separate return for
the surviving spouse. The decedent's items would be excluded, and the tax
liability would be refigured on the separate return.

How to Report Certain Income

This section explains how to report certain types of income on the final
return. The rules on income discussed in the other chapters of this
publication also apply to a decedent's final return. See Chapters 6
through 17, if they apply.

Interest and Dividend Income Form(s) 1099

Payers of interest and dividends report amounts on Forms 1099 using the
name and identification number of the person to whom the account is payable.
After a person's death, the Forms 1099 must reflect the new owner's name and
identification number. As the personal representative, you must furnish this
information to the payers.

For example, if an interest bearing account becomes part of the estate, you
must provide the estate's name and identification number to the payer so that
the Form 1099─INT, Interest Income, can reflect the correct payee information.
If the interest bearing account is transferred to a surviving joint owner, you
must provide the survivor's name and identification number to the payer for
the reporting on Form 1099─INT.

You should receive Forms 1099 for the decedent that report amounts of
interest and dividends earned prior to death. The estate or other recipient
(beneficiary) should receive separate Forms 1099 that report the amounts
earned after death and that are payable to them.

If you receive Forms 1099 that include both income earned before the date of
death (reportable on the decedent's final return) and income earned after the
date of death (reportable by the estate or other recipient), then you will
need to request new Forms 1099. You should contact the payers to ask them for
corrected Forms 1099 that properly identify the recipient of the income (by
name and identification number) and the correct amounts.

If you are unable to contact the payer or if you do not receive the corrected
forms on time, prepare the decedent's final return as follows.

1)  Report the total amounts shown on Forms 1099─INT and 1099─DIV, Dividends
    and Distributions, on Schedule 1 (Form 1040A), or on Schedule B (Form
    1040).

2)  On the appropriate schedule and part (several lines above lines 2 and/or
    6), enter a "subtotal" of the combined amounts of all of the interest or
    dividends listed.

3)  Below this subtotal, write "Nominee Distribution" and show the amount
    of any interest or dividends included on the Forms 1099 that belongs to
    another recipient. Subtract it from the subtotal.

4)  Report the net result on the proper line of the part of the income
    schedules being used (lines 2 and/or 6), and follow the directions shown
    for that line to carry the amount forward to the front of the return.

See Chapters 8 and 9 for more information about interest and dividend income.

Note: If the decedent received interest or dividends as a nominee (that is, in
the decedent's name, but the interest actually belongs to someone else), you
generally must give the actual owner a Form 1099.

Business Income

This section discusses some of the business income which may have to be
included on the final return.

Partnership income. If the decedent was a partner, his or her death
generally does not close the partnership's tax year. See Publication 541,
Tax Information on Partnerships, for how to treat partnership income if the
partnership year does end with the death of a partner.

As the personal representative, you must include on the final return the
decedent's share of partnership income for the partnership's tax year that
ends within or with the decedent's last tax year (year ending on the date
of death).

Do not include on the final return the decedent's share of partnership income
for a partnership's tax year that ends after the date of death. In this case,
partnership income earned up to and including the date of death is income
in respect of the decedent, which is discussed later in this chapter. Income
earned after the date of death to the end of the partnership's tax year is
income to the estate or successor in interest (beneficiary).

S corporation income. If the decedent was a shareholder in an S corporation,
you must include on the final return the decedent's share of S corporation
income for the corporation's tax year that ends within or with the decedent's
last tax year (year ending on the date of death). The final return must also
include the decedent's pro rata share of the S corporation's income for the
period between the end of the corporation's last tax year and the date of
death.

The income for the part of the S corporation's tax year after the
shareholder's death is income to the estate or other person who has
acquired the stock in the S Corporation.

Self-employment income. You must include on the final return the self
-employment income that the decedent actually or constructively received
or accrued, depending on the decedent's accounting method. For self-employment
tax purposes only, the decedent's self-employment income will include the
decedent's distributive share of a partnership's income or loss through the
end of the month in which death occurred. For more information on how to
compute the decedent's self-employment income, see Publication 533,
Self-Employment Tax.

Deductions, Credits, and Exemptions

Generally, the rules for deductions, credits and exemptions that apply to
individuals also apply to the decedent's final income tax return. On the final
return, claim deductible items that were paid before the decedent's death (or
accrued, if the decedent reported deductions on an accrual method).

Deductions

All of the deductions that are discussed in this publication also apply to
the final return as long as the decedent was eligible for the deduction at
the time of death.

You may generally choose to claim itemized deductions or the standard
deduction on the final return. See Standard deduction, later, for instances
when you may not choose the standard deduction or when the amount of the
standard deduction may be limited.

You should figure the amount of the decedent's itemized deductions before you
decide whether to itemize or claim the standard deduction to be sure that you
are using the method that gives you the lower tax.

Itemized deductions. If the total of the decedent's itemized deductions are
more than the decedent's standard deduction, the federal income tax will
generally be less if you claim itemized deductions on the final return. See
Chapters 22 through 30 for the types of expenses that are allowed as itemized
deductions.

Note. The amount you may deduct for itemized deductions is limited if adjusted
gross income is more than $105,250 ($52,625 if married filing separately). See
Chapter 21 for more information.

Medical costs. If you itemize deductions on the final return, you may be able
to deduct medical expenses of the decedent even though they were not paid
before the date of death. See Decedents in Chapter 22 for how this election
can be made.

Standard deduction. You can generally claim the full amount of the standard
deduction on the decedent's final return. However, you cannot use the standard
deduction if the surviving spouse files a separate return and itemizes
deductions. In that event, you must also itemize deductions on the decedent's
final return.

The amount of the standard deduction that you may claim on the decedent's
final return is generally the same as it would have been had the decedent
continued to live. A higher standard deduction is allowed only if the decedent
was blind or age 65 or over at the time of death.

If another taxpayer can claim the decedent as a dependent, the amount you can
claim for the decedent's standard deduction may be limited. See Chapter 20
for more information on how to determine the amount of the standard deduction.

Credits

Any of the tax credits that are discussed in this publication also apply to
the final return if the decedent was eligible for the credit at the time of
death. These credits are discussed in Chapters 33 through 36 of this
publication.

Tax withheld and estimated payments. There may have been income tax withheld
from the decedent's pay, pensions, or annuities before death, and the decedent
may have paid estimated income tax. To get credit for these tax payments, you
must claim them on the decedent's final return. For more information on how to
claim withheld taxes on the return, see Credit for Withholding and Estimated
Tax in Chapter 5.

Exemptions

You can claim the full amount of the personal exemption on the decedent's
final return unless the decedent can be claimed as a dependent by another
taxpayer. In that case, the decedent's own exemption amount on the final
return is zero. See Chapter 3 for more information on this limit and on
other dependency exemptions that may be allowed on the final return.

Tax Effect on Others

This section contains information about the effect of an individual's death
on the income tax liability of others: the survivors (including widows and
widowers), the beneficiaries, and the estate. If a personal representative
is handling the estate of the decedent, any survivor or beneficiary should
coordinate the filing of his or her own tax return with the personal
representative. The personal representative can coordinate filing status,
exemptions, income, and deductions so that the final return and the income
tax returns of the survivors, beneficiaries, and the estate are all filed
correctly.

For Survivors

If you are a survivor, you may qualify for certain benefits when filing your
own income tax return. This section addresses some issues that may apply to
you.

Inherited property. Property received as a gift, bequest, or inheritance is
not included in your income. However, if the property you receive in this
manner later produces income, such as interest, dividends, or rentals, then
that income is taxable to you. If the gift, bequest, or inheritance you
receive is the income from property, that income is taxable to you.

Joint return by surviving spouse. A surviving spouse can file a joint return
with the decedent for the year of death as long as the survivor has not
remarried before the end of that year. See Joint return, earlier.

If there is a dependent child, the surviving spouse may also be entitled
to use the standard deduction amount and the tax rates that apply to joint
returns for the 2 following years. See Qualifying Widow(er) With Dependent
Child in Chapter 2 for how to qualify.

The decedent as a dependent. If the decedent qualified as your dependent for
the part of the year before death, you can claim the full exemption amount
for the dependent on your tax return.

Income in Respect of the Decedent

All gross income that the decedent had a right to receive and that is not
includible on the decedent's final return is called income in respect of the
decedent. Instead of being reported on the final return of the decedent, the
income is included, for the tax year when received, in the gross income of:

1)  The decedent's estate, if the estate acquires the right to receive the
    income from the decedent,

2)  The person who acquires the right to the income directly from the
    decedent without going through the estate, or

3)  Any person to whom the estate properly distributes the right to receive
    the income.

Example 1. Joe Jones owned and operated an orchard, and he used the cash
method of accounting. He sold and delivered $2,000 worth of fruit to a
customer, but he did not receive payment before his death. When the estate
was settled, payment had still not been made, and the estate gave the right
to receive the payment to his niece. When she collects the $2,000, she must
include it in her income. It is not reported on the final return of the
decedent nor on the estate's income tax return.

Example 2. If, in Example 1, Joe Jones had used an accrual method of
accounting, the income from the fruit sale must be included on his final
return. Neither his estate nor his niece will report the income when the
money is later paid.

Example 3. Mary Smith was entitled to a large salary payment at the time
of her death. It was to be paid in five yearly payments. Her estate, after
collecting two payments, distributes the right to the remaining payments to
you, the beneficiary. None of the payments would be included on the decedent's
final return. The estate must include in its gross income, as income in
respect of the decedent, the two payments it received. You must include in
your gross income each of the three remaining payments as you receive them.

Transferring your right to income. If you transfer your right to receive
income in respect of a decedent, you must include in your income the larger
of:

1)  The amount you receive for the right, or

2)  The fair market value of the right you transfer. Fair market value is
    defined in Chapter 14 under Other Basis and Inherited Property.

Giving your right to income as a gift. If you give your right to receive
income in respect of a decedent as a gift, you must include in your gross
income the fair market value of the right at the time you make the gift.

Type of income. The character, or type, of income that you receive in respect
of a decedent is the same as it would have been had the decedent continued to
live. For example, if the income would have been a long-term capital gain to
the decedent, it will be a long-term capital gain to you.

Interest on certificates of deposit (CDs). Interest on CDs that is not
received by the date of death but that is earned between the date of the
last interest payment and the date of death is interest income in respect
of the decedent. Interest income earned on the account after the decedent's
death that becomes payable on CDs after death is not income in respect of a
decedent. Such interest is ordinary income that belongs to the respective
recipients and must be included in their gross income.

Installment payments. If the decedent had sold property using the installment
method and you receive the right to collect the payments after the date of
death, the payments you collect are income in respect of the decedent. You
will use the same gross profit percentage that the decedent used to figure
the part of each payment that represents profit. Include in your income the
same profit the decedent would have included had death not occurred. See
Publication 537, Installment Sales, for more information on the installment
method.

If you sell or exchange an installment obligation that you received from a
decedent, the rules explained in Publication 537 for figuring the gain or
loss on the disposition will apply. However, your basis in the obligation
is the same as the decedent's basis, adjusted for all installment payments
you received before the sale or exchange.

Other income. For examples of other income situations concerning decedents,
see Specific Types of Income in Respect of a Decedent in Publication 559.

Deductions in Respect of the Decedent

Deductions in respect of the decedent are items, such as business expenses,
income-producing expenses, interest, and taxes, for which the decedent was
liable, but which are not deductible on the decedent's final income tax
return. These expenses will be allowed when paid:

1)  As a deduction to the estate, or

2)  If the estate was not liable for them, as a deduction to the person who
    receives the decedent's property subject to these expenses.

Federal estate tax deduction. If you must include in your gross income an
amount of income in respect of a decedent, then you can claim a deduction
for part of any estate tax paid. The deduction must be claimed in the same
tax year that the income is included in your gross income.

You can claim the deduction only as a miscellaneous itemized deduction on
Schedule A (Form 1040). This deduction is not subject to the 2% limit on
miscellaneous itemized deductions as discussed in Chapter 30.

If the income is capital gain income, then in figuring the maximum capital
gain rate or any net capital loss limitation, the amount of the gain must
be reduced, but not below zero, by the amount of any estate tax deduction
attributable to such gain.

For more information on the income tax deduction for estate tax paid on
income in respect of a decedent, see Estate Tax Deduction in Publication 559.