When your estate goes through probate after your death, the personal representative that you appoint to oversee your estate has many responsibilities. They must collect and distribute your assets, pay debts and take care of any other administrative duties for the estate.
Your personal representative may also have to take care of any tax issues due to your death. Depending on the circumstances, certain tax returns might need to be filed, such as a final individual or estate tax return.
After you die, you are no longer considered an individual taxpayer as of your date of death. Your estate now becomes a new taxable entity.
Filing a final tax return
A final tax return is filed using the same forms as if the taxpayer was still alive, but the word “deceased” is written on the top of the return, along with your name and date of death.
Your final tax return must be filed at the tax filing deadline of the year following your death unless an extension is granted. The final return should only report income from the beginning of the year until your date of death.
If you were married on your date of death, your spouse is still considered married for the entire year for federal income tax purposes. They can file a joint return, provided they do not remarry before the end of the tax year.
Outstanding tax debt
Additionally, if you owed any tax debt when you died, this debt must be paid, the same as any other debts. Your assets generally cannot be distributed to your heirs before debt is paid, since they may need to be sold off to satisfy the debt.
The personal representative is not required to pay tax, or any other debts, out of their own personal funds. There are some exceptions to this rule.
For example, your personal representative is supposed to use your estate assets to pay off your tax debt. However, if they mismanage the estate assets, leaving them unavailable, a court could order them personally liable for the tax debt.
These rules can complicate the probate process, but there are resources who can help you understand the tax impact on your estate.