Income taxes for a dead person

[Colonel_Buck]

If a person dies and his estate is not large enough to cover his income tax liabilities due the next April, how are the taxes paid? Do the heirs and/or executor have to pony up the difference?

If a person dies and his estate is larger than his income tax liabilities, who is responsible for making sure the taxes are paid? Executor or all the heirs?

If a person dies and his estate is larger than his income tax liabilities and the taxes are not paid, who does the IRS come after? The executor or all the heirs?

[AndyK]

For simplicity, we shall assume the deceased was not involved in a marriage, trust, business partnership or other complicating arrangements -- just a stand-alone person.

Okay. The key word is ESTATE.

No matter what happens, the heirs are merely beneficiaries of the estate and have absolutely no responsibility for the taxes or tax return.

As to the executor, the responsibilities somewhat depend on the specific relationship with the estate varying from a volunteer, uncompensated family member (for example) to an attorney compensated for services.

In the simplest case, the estate is responsible for filing the return and paying the taxes.

The IRS, generally, has better things to do than chase down the estates of average citizens for a missing final tax return.

HOWEVER, if this is a large estate (financially) with lots of intricate details, it might warrant attention. Although it might take a few years, the IRS could conduct an audit and attempt to claw back any unpaid taxes from the inheritors.

The simplest approach (for a large estate) is to employ a qualified tax-return preparer and have them close the matter out.

[The Observer]

The IRS, generally, has better things to do than chase down the estates of average citizens for a missing final tax return.

Actually, the IRS does generate delinquent return investigations for missing 1041 and 706 returns to revenue officers to pursue. And it is seen as one of the better things to do since a missing return usually indicates the estate will owe significant taxes.

HOWEVER, if this is a large estate (financially) with lots of intricate details, it might warrant attention. Although it might take a few years, the IRS could conduct an audit and attempt to claw back any unpaid taxes from the inheritors.

Well, I have never seen such an action described as a "clawback" although I am sure you are using it to mean that the beneficiaries can be pursued for the owed taxes. But it does not require a court order to do so due to the fact that the assets of the estate are encumbered by the estate tax lien which allows the IRS to administratively levy and seize to collect. This can proceed against the executor based on their fiduciary responsibility and the beneficiaries who have received assets from the estate.

[Arthur Rubin]

If a person dies and his estate is larger than his income tax liabilities, who is responsible for making sure the taxes are paid? Executor or all the heirs?

The executor is responsible for ensuring that all debts of the estate are paid. If not paid, any creditor can go after the executor or the beneficiaries (follow the money) to recover a valid debt; most debtors have a shorter statute of limitations than the IRS.

If the money was taxable to the beneficiaries and later recovered by a creditor to the estate, they (the beneficiaries) can usually get some kind of credit for the tax paid; "claim of right" comes to mind. I don't know about any inheritance tax paid by the beneficiaries....

(Note: "estate tax" and "inheritance tax" are two completely independent taxes. "Estate tax" is paid on the amount of the estate before distributions, and "inheritance tax" is paid on distributions from the estate. The US and some states have estate taxes, and some states have inheritance taxes. (State "includes" the District of Columbia....))

[RobertBurns]

Income tax for a dead person.. How is this possible

[Pottapaug1938]

Income tax for a dead person.. How is this possible

Easy. The dead person is still earning income, through his estate. Elvis Presley, for example, is making millions even today. And, even if any one of us dies, we still have the possibility of income before our estate is distributed to its heirs.

[Dr. Caligari]

Income tax for a dead person.. How is this possible

Here's the easiest, and most common, example: If I earn income all (or part of the) year in 2016, but die before April 15, 2017, I still owe income tax for 2016 (to be paid by the executor of my estate).

Less common, but still possible, is Pottapaug's example of estates that continue to earn income after the taxpayer's death. In this instance, I believe the estate itself, and not the deceased person, is treated as the taxpayer. But either way, the IRS still gets its cut of Elvis's record royalties.

[Burnaby49]

In Canada the dead get taxed a number of ways;

1 - As mentioned, on income earned during the year until death.

2 - On accrued but unrealized capital gains. The Income Tax Act deems that all of a deceased's capital properties are disposed of at fair market value at the moment immediately before death and reaquired at the same moment at the same fair market value. This triggers all accrued capital gains. These properties are transferred to the estate at the deemed fair market value.

3 - There are probably other deeming provisions and outstanding untaxed amounts that are brought into the deceased's income up to the moment of death but, if so, I've forgotten and I'm too lazy to research the issue.

[eric]

Actually there are two common estate issues that cause tax problems in Canada. There is the capital gains provision and the fact that it is perfectly possible to forego paying capital gains tax until your death and leaving it to your executor to handle a lifetime of capital gains tax. The other, even more common issue is disposal of the proceeds of a RRSP or RIF. The most typical scenario is the deceased's RRSP is disbursed to the estate beneficiaries shortly after death since it's easy cash. Three to five years later the CRA (no rush since the person is dead), before they will issue a tax clearance note informs the executor that the RRSP is deemed to be taxable income in that year of death and if the estate hasn't held back the funds the beneficiaries, who have probably spent the money by then, are responsible for making up the deficit.

Been there, done that, have the T shirt, but at least I held back what I estimated would be the tax burden on the RRSP before it was disbursed to the beneficiaries.

[Burnaby49]

Actually there are two common estate issues that cause tax problems in Canada. There is the capital gains provision and the fact that it is perfectly possible to forego paying capital gains tax until your death and leaving it to your executor to handle a lifetime of capital gains tax. The other, even more common issue is disposal of the proceeds of a RRSP or RIF. The most typical scenario is the deceased's RRSP is disbursed to the estate beneficiaries shortly after death since it's easy cash. Three to five years later the CRA (no rush since the person is dead), before they will issue a tax clearance note informs the executor that the RRSP is deemed to be taxable income in that year of death and if the estate hasn't held back the funds the beneficiaries, who have probably spent the money by then, are responsible for making up the deficit.

Been there, done that, have the T shirt, but at least I held back what I estimated would be the tax burden on the RRSP before it was disbursed to the beneficiaries.

If you hadn't held back sufficient funds to clear the taxes you'd have been screwed. As you note the executors are responsible for ensuring that all taxes are paid on the estate before distributing it. If they don't they become personally liable for the uncollected tax. I've seen the CRA go after the executors on a number of occasions.

Technically there is no "estate tax" in Canada. An estate tax is a tax levied on the value of an estate. Canada only taxes what would have eventually become income to the taxpayer had he not died. Your guy would have paid tax on the RRSP in the normal course of events but, like the issues I noted, all outstanding taxes are triggered on death. But this is still just income tax. You can die with a multi-million dollar estate and have no taxes applicable on it if it is comprised of tax-free items like cash in the bank, life insurance, or properties with no outstanding taxable capital gains.

Canada had an estate tax until December 31, 1971 however it did not have a capital gains tax. On that date the Estate tax was repealed and the capital gains tax came into effect.

[Famspear]

......either way, the IRS still gets its cut of Elvis's record royalties.

I imagine that this rule might be known as the "Even Though Elvis Has Left the Building Rule"........

[AndyK]

Income tax for a dead person.. How is this possible

Here's the easiest, and most common, example: If I earn income all (or part of the) year in 2016, but die before April 15, 2017, I still owe income tax for 2016 (to be paid by the executor of my estate).

Less common, but still possible, is Pottapaug's example of estates that continue to earn income after the taxpayer's death. In this instance, I believe the estate itself, and not the deceased person, is treated as the taxpayer. But either way, the IRS still gets its cut of Elvis's record royalties.

Minor correction:

If a person (real or artificial) earns any income in 2016, it may or may not be taxable and amy or may not exceed the threshhold mandating filing a return.

Assuming a return IS mandated, it must be filed. If the earner dies before the filing date (ignoring fiscal years and various extensions) someone must file the return and make whatever payment is due.

Also, if the decedent is due a refund, someone must file a return to collect the overpayment.

One of the things that sometimes gets very interesting is a decedent making quarterly estimated payments who neglects to make one of the post mortem payments. To throw additional monkey wrenches into the issue, it is possible for a member of a partnership to shuffle off during an earnings year. The remaining partner(s) accountant then earns his fee sorting out the mess.

If one wishes, one could pursue the various implications of a corporation becoming a Norweigan Blue, but it would be advisable to wear the anti-brain-explosion helmet.