What Is a Final Return and When Is It Required?

Filing taxes for a deceased individual requires submitting a final return to report any income earned up to the date of death. Understanding this process helps prevent errors and penalties. Certain deductions and credits may still apply, and outstanding liabilities or potential refunds must be considered. Beneficiaries may also be affected by how the return is handled.

When a Final Return Is Required

A final tax return is required if the deceased met standard filing requirements. The IRS treats this return as if the person were still alive for that tax year, with income earned until death reported. The filing deadline remains April 15 of the following year unless an extension is requested.

The executor or personal representative of the estate is responsible for filing. If no formal executor is appointed, a surviving spouse or next of kin may do so. The return is filed using Form 1040, with “Deceased” written next to the taxpayer’s name. If a joint return is filed with a surviving spouse, standard deductions and tax brackets for married couples still apply.

Income reported includes wages, self-employment earnings, dividends, interest, and other taxable amounts received before death. For Social Security benefits, only amounts paid before death are included. Income earned afterward, such as investment gains or rental income, is reported separately on an estate or trust tax return using Form 1041.

Permissible Deductions and Credits

Deductions and credits the deceased qualified for before death may still be claimed. These must be based on expenses incurred before death, as amounts paid afterward by the estate or beneficiaries generally do not qualify.

Medical Costs

Unpaid medical expenses can be deducted if they were for care received within one year before death and were paid by the estate or surviving family members. These costs must exceed 7.5% of the deceased’s adjusted gross income (AGI) to be deductible, as outlined in IRS Publication 502. Eligible expenses include hospital bills, prescription medications, long-term care, and health insurance premiums.

For example, if the deceased had an AGI of $50,000 and $10,000 in qualifying medical expenses, only the amount exceeding 7.5% of AGI—$6,250—would be deductible. If these expenses were not deducted on a prior year’s return, they can be claimed on the final return. Alternatively, the estate may deduct them on Form 706, the federal estate tax return, but they cannot be claimed on both.

Unreimbursed Business Outlays

If the deceased was self-employed or incurred work-related expenses as an employee, certain unreimbursed costs may be deductible. These include home office expenses, professional dues, travel costs, and business-related supplies.

For self-employed individuals, business expenses are reported on Schedule C, and any net profit or loss is included in the final return. A home office deduction may apply if a portion of the home was used exclusively for business. For example, if 20% of the home was dedicated to work, 20% of qualifying expenses like rent and utilities could be deducted. Business losses may offset other income, reducing overall tax liability.

Eligible Tax Credits

Tax credits the deceased qualified for before passing can still be claimed. These include the Earned Income Tax Credit (EITC), Child Tax Credit, and education-related credits like the American Opportunity Credit.

For example, if the deceased met the income and dependent criteria for the EITC, the credit can still be applied. If they paid college tuition and qualified for the Lifetime Learning Credit, it may also be claimed. Refundable credits, such as the Additional Child Tax Credit, can result in a refund even if no tax is owed. However, credits requiring future actions, such as energy-efficient home improvements, cannot be claimed unless the work was completed before death.

Handling Outstanding Liabilities

If the deceased owed taxes, the estate must settle the balance before distributing assets to heirs. The IRS can claim outstanding balances from estate funds, and failure to address these liabilities results in penalties and interest.

If the estate lacks sufficient funds, the executor may need to liquidate assets, such as selling stocks, withdrawing funds from bank accounts, or selling real estate. If an estate is insolvent—meaning debts exceed assets—tax obligations take priority over most unsecured debts.

Interest and penalties on unpaid taxes continue to accrue. The IRS charges interest based on the federal short-term rate plus 3%, adjusted quarterly. Failure-to-pay penalties amount to 0.5% of the unpaid tax per month, up to a maximum of 25%. If an executor needs additional time to settle financial affairs, they can request an extension using IRS Form 4768, though interest will still accrue.

An estate may qualify for an installment agreement to pay tax liabilities over time, especially if assets are tied up in illiquid investments like real estate or privately held businesses. The IRS allows estates to apply for a payment plan if the total tax due is under $50,000. For larger amounts, financial statements may be required to justify a structured repayment schedule.

Potential Refund Claims

If the deceased overpaid taxes or was eligible for refundable credits, a refund may be due to the estate or heirs. A standard refund can be processed with the final return, but if someone other than a surviving spouse on a joint return is claiming it, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, must be submitted to verify authority and prevent fraudulent claims.

If tax withholdings from wages, retirement distributions, or estimated tax payments exceeded the final tax liability, the overpayment results in a refund. Additionally, deductions for contributions to a traditional IRA or HSA may reduce taxable income, increasing the refund amount. Refundable credits, such as the Premium Tax Credit for health insurance purchased through the marketplace, may also contribute to a refund if the deceased had qualifying coverage.

Effect on Beneficiaries

The final tax return affects beneficiaries, as outstanding tax liabilities must be settled before assets are distributed. If the estate lacks funds, beneficiaries may receive a reduced inheritance, particularly if assets need to be sold.

If a refund is due, beneficiaries may need to wait for IRS processing before receiving their share. If multiple heirs are involved, the executor must distribute the refund according to the will or state intestacy laws if no will exists. Certain tax attributes, such as capital loss carryovers or passive activity losses, do not transfer to heirs and expire upon death, potentially impacting the estate’s financial picture.