What Taxes Are Owed After a Person Dies?

When an individual passes away, their tax obligations do not end. A series of final tax-related duties must be completed for the deceased person and the assets they leave behind. These responsibilities fall to a personal representative, who is an executor named in the will or a court-appointed administrator. This representative navigates the various tax filings required to settle the deceased’s financial affairs with the government.

The Deceased’s Final Income Tax Return

The personal representative must file the deceased’s final federal income tax return using Form 1040 or 1040-SR. This return covers the period from the beginning of the year up to the date of death, reporting all income earned and claiming all eligible deductions during that timeframe. If no representative is formally appointed, a surviving spouse or another person in charge of the decedent’s property is responsible for filing.

The deadline for this final return is the standard tax filing date, April 15 of the year following the person’s death. When filing a paper return, the representative must write “Deceased,” the person’s name, and the date of death across the top of the Form 1040. The appointed representative signs the return, and if it is a joint return, the surviving spouse must also sign. A surviving spouse filing a joint return without an appointed representative should write “filing as surviving spouse” in the signature area.

If the final return results in a tax refund, the process for claiming it depends on who is filing. A surviving spouse on a joint return or a court-appointed representative does not need to take extra steps. However, if someone else is filing to claim the refund, they must also file Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. A copy of the death certificate is not required with the final return.

The Estate as a Taxable Entity

Upon a person’s death, their assets are gathered to form an estate, which becomes a new and separate entity for tax purposes. The personal representative is responsible for managing this entity, which includes safeguarding assets, paying debts, and distributing property to heirs. To manage the estate’s finances, it must be officially recognized by the IRS.

To manage the estate’s finances, the representative must obtain an Employer Identification Number (EIN) from the IRS. An EIN is necessary for the estate to open a bank account, which is used to hold its cash, pay its bills, and file its own tax returns. The EIN formally establishes the estate as a separate legal entity for tax administration.

The application for an EIN is made using Form SS-4, Application for Employer Identification Number. The fastest method is to apply online through the IRS website, which provides the EIN immediately. The online process requires information about the deceased, the executor, the estate’s mailing address, and the date of death. The form can also be submitted by fax or mail, which takes longer to process.

Filing the Estate Income Tax Return

An estate with an EIN may be required to file an annual income tax return, Form 1041, U.S. Income Tax Return for Estates and Trusts. An estate must file Form 1041 if it has a gross income of $600 or more during its tax year or if any beneficiary is a nonresident alien. The estate’s income can include interest, dividends, rent from real estate, or capital gains from the sale of assets.

A specific category of income that must be accounted for is “Income in Respect of a Decedent” (IRD). IRD is income the deceased was entitled to but had not received before death, such as an unpaid final paycheck or distributions from a traditional IRA paid to the estate. This income was not included on the decedent’s final Form 1040 but is instead taxed to the estate or the beneficiary who receives it. The character of the income remains the same as it would have been for the decedent.

The estate can claim deductions for expenses such as executor fees, legal fees, and administration costs. When the estate distributes money to beneficiaries, it can take an income distribution deduction, passing the income and tax liability to them. The estate then issues a Schedule K-1 (Form 1041) to each beneficiary, detailing their share of the income, which they must report on their personal tax returns.

Understanding Federal and State Estate Taxes

The estate income tax is different from the estate tax, which is a tax on the transfer of wealth from the deceased to their heirs. This tax is calculated on the value of the decedent’s gross estate and reported on Form 706, United States Estate Tax Return. The gross estate includes all property owned at death, such as:

• Cash
• Securities
• Real estate
• Other assets

The federal estate tax affects a very small percentage of the population due to a high exemption amount. For 2025, an estate is not subject to federal estate tax unless its value, combined with prior taxable gifts, exceeds $13.99 million. This exemption is portable, meaning a surviving spouse can use any unused portion of their deceased spouse’s exemption, but this requires filing Form 706 even if no tax is due. For estates that do exceed the exemption, the tax rate is 40% on the value above the threshold.

While few estates owe federal estate tax, some may be subject to taxes at the state level. Many states impose their own estate tax, often with much lower exemption amounts than the federal government. A different type of tax, an inheritance tax, is levied by a handful of states. Unlike an estate tax paid by the estate, an inheritance tax is paid directly by the beneficiaries who receive the property.

Tax Implications for Beneficiaries

A tax provision for beneficiaries is the “step-up in basis.” The “basis” of an asset is its cost for tax purposes, typically the original purchase price. When an asset is inherited, its basis is “stepped up” to its fair market value on the date of the original owner’s death.

This step-up provides a tax benefit. For example, if a person inherits stock purchased for $10,000 but is worth $100,000 on the date of death, the beneficiary’s basis becomes $100,000. If the beneficiary immediately sells the stock for $100,000, they would owe no capital gains tax. This rule applies to assets like stocks, real estate, and other tangible property.

However, not all inherited assets receive this treatment. The most common exception is retirement accounts, such as traditional IRAs and 401(k)s, which do not receive a step-up in basis. When a beneficiary takes distributions from an inherited traditional retirement account, the money is taxed as ordinary income, just as it would have been for the original owner. The rules for these inherited accounts depend on the beneficiary’s relationship to the decedent and the account type.