IRS Publication 559: Survivor & Executor Tax Duties

IRS Publication 559, “Survivors, Executors, and Administrators,” is a guide for the personal representative of a decedent’s estate. This publication outlines the necessary steps for filing final tax returns and managing the tax obligations of the estate. The information addresses the distinct tax filings required for the decedent and their estate, clarifying the obligations of the representative and the eventual beneficiaries.

Filing the Decedent’s Final Tax Return

The personal representative is responsible for filing a final Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, for the person who has died. This return covers the period from the beginning of the tax year up to the date of death. All income earned by the decedent during this timeframe must be reported, and all eligible deductions and credits can be claimed. The due date for this final return is April 15 of the year following the individual’s death.

If the decedent was single, the filing status is “single.” If the decedent was married at the time of death, the surviving spouse can file a joint return for that year, provided they do not remarry before the end of the year. This joint return would include the decedent’s income up to the date of death and the surviving spouse’s income for the entire year.

When preparing a paper return, the word “DECEASED,” the decedent’s name, and the date of death should be written across the top of the Form 1040. The appointed personal representative must sign the return, and if a joint return is filed, the surviving spouse must also sign. If no personal representative has been appointed, the surviving spouse should write “Filing as surviving spouse” in the signature area.

Should the final tax return result in a refund, the process for claiming it varies. If a surviving spouse is filing a joint return, they can receive the refund directly. In other situations, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, must be filed with the tax return. A court-appointed personal representative does not need to file Form 1310 but should instead attach a copy of the court document showing their appointment.

Filing the Estate’s Income Tax Return

After a person’s death, a new taxable entity, the estate, is created. This estate is legally separate from the decedent and has its own tax reporting requirements. The personal representative must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, if the estate generates more than $600 in gross income during its tax year.

Before filing Form 1041, the personal representative must obtain a separate tax identification number for the estate, known as an Employer Identification Number (EIN). The estate’s income is calculated in a manner similar to that of an individual, including income from sources like dividends, interest, or rent collected from the decedent’s properties after the date of death. These assets are now considered property of the estate, and the income they produce is reported on Form 1041.

The personal representative must select the estate’s tax year. The estate can adopt either a calendar year, ending on December 31, or a fiscal year, which is a 12-month period ending on the last day of any month other than December. This choice can have strategic implications for managing the timing of income and distributions. For a calendar-year estate, the Form 1041 is due by April 15 of the following year.

Estates are allowed deductions for costs incurred in administration and an income distribution deduction. This allows the estate to deduct income that is required to be, or is properly, distributed to beneficiaries during the year. The beneficiaries are then responsible for paying tax on this income. This distribution of income to beneficiaries is reported to them on a separate form.

Understanding Income in Respect of a Decedent

Income in Respect of a Decedent (IRD) is gross income that the decedent was entitled to receive but had not yet received before their death. This income was not included on the decedent’s final Form 1040 because it had not been collected. This income becomes taxable to the person or entity that receives it after death.

Common examples of IRD include:

• Unpaid salary, wages, or commissions earned before death but paid after.
• Distributions from a traditional IRA or a 401(k) plan.
• Interest and dividends that accrued before death but were not paid.
• Payments from an installment sale that continue after death.

The character of the income remains the same as it would have been for the decedent. If the income would have been a long-term capital gain to the decedent, it is treated as a long-term capital gain to the recipient.

The tax liability for IRD falls to whoever inherits the right to receive the income. If the estate collects the IRD, it reports the income on the Form 1041. If a beneficiary receives the IRD directly, such as being the named beneficiary of an IRA, that individual reports the income on their own personal tax return for the year they receive it.

Because IRD assets can be included in the decedent’s gross estate for federal estate tax purposes, they may be subject to both estate tax and income tax. To alleviate this potential double taxation, the tax code provides a deduction for the federal estate tax paid on IRD. However, this deduction is a miscellaneous itemized deduction, which has been suspended for tax years 2018 through 2025 and is not currently available.

Tax Reporting for Beneficiaries

Beneficiaries of an estate or trust receive a Schedule K-1 (Form 1041) from the executor or administrator. This document shows each beneficiary’s specific share of the income, deductions, and credits from the estate for the tax year. Each beneficiary receives a copy to use when preparing their personal income tax return.

The Schedule K-1 details the different types of income a beneficiary has received, such as interest, dividends, and capital gains. Beneficiaries must report these amounts on the corresponding lines of their own Form 1040.

When a beneficiary inherits property, such as real estate or stocks, the tax basis of that property is adjusted. The basis for inherited property is its fair market value (FMV) on the date of the decedent’s death. The personal representative can elect to use an alternate valuation date, which is six months after the date of death, but this election is only available if it reduces both the total value of the gross estate and the estate tax owed. This “stepped-up basis” means the basis is increased to the current market value, wiping out any appreciation that occurred during the decedent’s lifetime for income tax purposes.

This basis adjustment is for determining the capital gain or loss if the beneficiary later sells the inherited asset. For example, if a stock was purchased for $10,000 but was worth $100,000 on the date of death, the beneficiary’s basis becomes $100,000. If the beneficiary sells the stock for $105,000, they would only pay capital gains tax on the $5,000 of appreciation that occurred after they inherited it.