Dealing with the tax affairs of a loved one may seem like a painful prosaic issue to handle after they have passed away, but it is a process that should begin after a period of mourning. When a person leaves this world, they do not take their debts nor their assets with them, and at some point, the time comes to go through their finances to settle everything once and for all. Apart from anything else, this is a process that needs to happen before a will can be settled and read.
The first thing to know is that the decedent’s tax burden does not transfer to another person – the spouse, or children, will not be asked to pay out of pocket for anything that was left owing. However, creditors will believe they are entitled to receive payments that they were owed – and in many cases, the law says they’re right. There is a process for handling all of this, of course. It takes time and won’t always be easy, but it will allow you to settle your loved one’s affairs for them, once and for all.
Step 1: Ask the IRS for the relevant information.
Data Protection law tends to mean that their tax affairs are their own business during a person’s life, and in general, financial authorities will want to speak to the account holder. Upon their passing, it is considered typical that an individual is nominated to act on their behalf in financial matters. It will generally be someone close to the decedent and someone who had potentially been selected to deal with these matters after the death. To request the salient information from the IRS, you must first send them the following:
- The decedent’s name, address, and social security number
- Copy of Letters of Testamentary, as issued and verified by the court, or
- If there has been no court proceedings, a filled and signed copy of IRS form 56
- A copy of the death certificate
The importance of the Letters of Testamentary or form 56 is that they verify you as a person responsible for the decedent’s estate. You will then be able to request information that is vital to close their estate. Usually, Tax Return Transcripts will be sufficient to give you the information you need on your loved one’s tax affairs, and these can be requested for free. You should also seek form 8822, which allows you to change the address on the tax account to your own. This will mean there is no danger of anyone still living at the address receiving unwanted mail for a deceased loved one.
Step 2: Name someone as an estate administrator.
An estate administrator is someone who is legally empowered to deal with a deceased person’s financial affairs. They may be related to the deceased by marriage or blood, or may be named in the will as an executor. They may, in some cases, be an attorney. Their responsibilities will include:
- Gathering together the assets of the decedent, which can consist of real estate property, stock holdings, and financial savings.
- Satisfying the demands of creditors.
- Overseeing the distribution of items bequeathed in the will to the deceased’s inheritors.
- Filing income taxes for the deceased (IRS form 1040) and the deceased’s estate (IRS 1041).
- Obtaining an Employer Identification Number for the deceased if they owned a company.
- Filing an Estate Tax Return (IRS 706) if necessary.
Step 3: Respond to creditors.
Any creditors who were owed money need to be informed by means of a petition from the administrator, which gives them 90 days from the date of the petition to file what is called a “proof of claim.” The proof of claim will document how much money is owed to a creditor; these amounts should then be settled from the money held by the estate.
Step 4: Filing tax returns for the decedent
The decedent’s final tax return will need to be filed by the estate just as they would have filed one when they were alive. Earnings that have been generated since the start of the tax year must be declared as usual. Any taxes owed will be paid by the estate, and any refunds due will be due to the estate. Because of the complicated nature of filing a tax return for someone who has passed away, it is a good idea to seek the advice of a tax expert with experience in handling these matters. They will know how to file returns accurately and be able to clarify any issues you may have.
Step 5: Filing tax returns for the estate
The estate may need to file two sets of tax returns – one for income tax and one for estate tax. A tax preparation expert will be well-placed to give you guidance on what is needed and when, but the USA has a comparatively high estate tax threshold, so there is a possibility that you will not have to file an estate tax return. Assets that generate an income will be eligible for taxation. These may include:
- Real Estate
- Investment funds
- Any other form of saleable holding
If you are not sure whether the estate income tax return covers something, you can ask one of our tax experts. It is better to declare it and not be taxable than for the opposite to be the case.
Step 6: Settle any remaining affairs with the IRS
On being informed of a person’s death, the IRS places a lien on their property to prevent assets from being sold off before creditors can be satisfied. Once creditors and tax liabilities are settled, you can apply for a certificate of discharge using form 4422. Instructions for filling it in can be found on IRS Publication 783, and we can assist with this. In addition, to prevent the worrisome possibility of identity theft, copies of the death certificate should be sent to all of the major credit reporting agencies. They will then put a deceased alert on the credit report so that anyone attempting to take out credit in the deceased’s name will immediately be flagged up.
If a loved one has passed and there is tax debt, please contact us today by phone or email. It is never a good idea to approach complex financial decisions without sound advice from a team who really understands the choices you’re weighing; therefore, we are here to assist you when it comes to tax debt relief and to keep the IRS out of your life.