Depending on your particular situation, the death of a family member usually has tax implications. According to Internal Revenue Service guidelines, the spouse or person in charge of the estate must file a final tax return for the deceased for the year of death. Related tax issues include reporting the decedent’s earnings and income, paying federal estate taxes that may be due, claiming a refund and how inheritances can affect the income and tax liability of surviving beneficiaries.
The death of a spouse can affect a taxpayer’s filing status for up to two years following his death. Generally, the surviving spouse can file using the “married filing jointly” status for the year of death. You can claim the personal exemption for your deceased spouse as well as the full standard deduction if you do not itemize deductions. If you itemize deductions, you can deduct medical bills your deceased spouse incurred as long as you pay them within one year after your spouse’s death. You can file as a “qualifying widow/widower” for the following two years if you have a dependent child, have not remarried and provide more than half the cost of maintaining a home for a dependent child who resides with you for the entire tax year.
Claiming a Tax Refund
Even if a deceased taxpayer owes no taxes and is not required to file a tax return for the year of death, if she had taxes withheld and was entitled to receive a refund, her spouse or the executor of her estate must file a return to claim the refund. Individuals other than the surviving spouse filing a joint return or a person appointed by the court to represent the deceased’s estate must use Form 1310 -- Statement of Person Claiming Refund Due a Deceased Taxpayer -- to request the tax refund.
Loss of a Child
When a child or other qualifying relative dies, you can claim the dependent exemption for the year of death as long as the child lived in your home for more than half the time she was alive. Although you may claim an exemption for an infant who lived for only a few minutes or hours, you cannot claim an exemption for a child who was still born. If your deceased child meets the IRS dependency tests, you may qualify to claim your child for the Earned Income Tax Credit and the Child Tax Credit for the tax year in which she died.
If you are the beneficiary of an IRA, you might not be subject to an early withdrawal penalty. But you will have to include any taxable distributions you receive from a traditional IRA you inherit in your gross income for the year. For an inherited Roth IRA, you shouldn’t have to pay tax on the benefits you receive as long as the IRA meets the qualified distribution requirements. You can treat a Roth IRA account as your own if you inherit it from your spouse. The distribution rules differ for beneficiaries who are someone other than the deceased’s spouse.
Inheriting Other Assets
Unless you roll a 401(k) plan you inherit into your own individual retirement account where the money continues to grow tax-deferred, the distributions you receive will be taxed as ordinary income. Similarly, when you inherit an annuity, whether you receive a lump sum or regular annuity payments, distributions are taxed as ordinary income. Annuities are considered part of the estate when it comes to figuring estate tax. Generally, an estate tax is due only after the total value of the estate’s assets exceeds $1 million. Calculating the value of the estate includes both probate and nonprobate assets that will be distributed to the decedent's beneficiaries.
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