Filing a Tax Return when Someone You Love Has Died

It's easy to feel overwhelmed after the death of a loved one. Making the situation worse is the routine, day-to-day obligations that continue even when you feel like the world should stop and take notice of your loss. The inevitable truth is that life, or rather the business of life, goes on.

One of the obligations you'll need to face is filing your tax return and your loss may have a profound impact on your tax situation this year.

Compounding the difficulty is the feeling that a final tax return is a monumental act of closure that you may not be ready to face. In fact, it's not uncommon for loved ones to delay completing tax returns for months or even years after the tax return deadline.

There are three situations that may arise:

• Filing as the executor of an estate or representative of a family member
• Filing as the surviving spouse
• Filing as a parent or couple who have lost a child or dependent

Filing as a Representative

You may be called upon to file a tax return for a deceased family member if you serve as the executor of the estate or the family member's personal representative. Typically this person may be related to you as a brother or sister, uncle or aunt, an adult child, or even a close friend. Any time you serve as an executor, you will need to determine whether you will need to file the decedent's final tax return.

Generally, all the rules that would apply to the decedent if he or she were still alive will apply for the final tax return. The only difference is the tax year ends as of the date of death.

The first step in filing a return is to determine the tax year(s) that need to be prepared. One thing to consider is when the person actually died. If the person died after the close of the tax year but before the return was filed, you will need to prepare two tax returns.

For example, Bob died on February 16, 2006. He has not yet filed his tax return for 2005. As executor, you will need to file a tax return for 2005, but the final tax return will be for 2006. You would need to consider any income and deductions Bob incurred during January and February 2006.

The rules for determining whether or not a return needs to be filed are the same for any other individual. Read the rules for the appropriate tax form (i.e., Form 1040) for guidelines. Even if the decedent is not required to file a tax return, as executor you may want determine if a refund is possible. If this is the case, you should file a return.

If you prepare a return and are claiming a refund, you'll need to include a Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, with the return unless you are the surviving spouse or a court-appointed representative. (A court-appointed representative will attach the court documents to the return.)

On the top of the tax return, print the word "Deceased." Sign the return at the bottom followed by the words, "Personal Representative."

Most individuals use the cash method for determining income and deductions. This means that income is recorded when it is actually received and expenses are deducted when they are actually taken. The result of this is that the final tax return only reflects income and deductions up to the date of death.

Any other tax liabilities or credits should be calculated just as if the person were alive. The decedent is eligible for any credits that would have been available if they were alive.

As with any other person, the filing date for the return of a decedent is April 15th unless that date falls on a Saturday, Sunday, or legal holiday. File the return with the IRS service center where the decedent would normally have been required to file.

In addition to the final tax return of the decedent, you may be required to complete tax returns for the estate using a Form 1041. The tax return for the estate would include all income and expenses recorded after the date of death. The estate will have its own tax identification number and exists until the final distributions of assets are made to the heirs and the estate is closed by the Probate Court. The estate returns are generally calculated in the same way as the personal tax return and a Form 1041 is required every year the estate remains open.

Filing as Surviving Spouse

If your spouse dies, you will file as the surviving spouse. Generally, the rules are the same as for an executor or personal representative.

You may file using the married filing joint status as long as you have not remarried prior to the end of the tax year in which your spouse died. If you have remarried, you would file the decedent as "married filing separate."

Include only income earned by the decedent while he or she was still alive but include all of your income for the entire year.

On the final return, write "Deceased" followed by the date of death next to the name of the decedent. Sign the return at the bottom and write "Filing as Surviving Spouse" in the signature space of your spouse.

Filing with a Deceased Dependent Child

Generally, a child who dies during the year will qualify as your dependent provided all other requirements are met. In other words, if the child would have qualified as your dependent had he or she lived, the will still qualify in the year they died.

Special attention should be given to residency requirements. When determining whether a child lived with you more than half of the year for dependency purposes, you can use the actual number of months the child lived.

For example, if the child died in April, they will be considered to have lived with you for the entire year even if the actual number of months was only 4.

If you split the custody of the child with a divorced parent, you may use the actual number of days the child lived to meet the residency test. In the previous example, if the child lived 110 days during the year, you could claim the dependency if the child lived with your more than 55 days.

If your child is born and died during the year, you can claim him or her as a dependent as long as they were born alive. Unfortunately no dependency can be claimed for a stillborn child.

If the child has a Social Security Number, be sure to include it on the return. Otherwise, include a copy of the death certificate with the return. Your return would not be eligible for electronic filing in this case.

Some Other Guidelines

A tax liability may be forgiven for members of the military who die in a combat zone or as a result of a terrorist attack. Anyone killed in a terrorist attack may also have their liability forgiven. There are specific rules that govern these situations, so consult IRS guidelines for more detail.

Decedents who were involved in small businesses, partnerships, S-corporations, or trusts may have unusually complicated returns. Be sure to consult a tax professional for the specifics.

IRS Publication 559, Survivors, Executors, and Administrators, goes into depth on the issues of filing a decedent's tax return. You can request this publication by contacting the IRS or downloading it from www.irs.gov.

Consult a tax attorney or professional for specific advice that pertains to your unique situation.

Losing a loved one is not easy. Completing the final tax return for someone you loved can be an emotionally difficult and stressful time. Don't be afraid to get help from others during this time - a family member, friend, or even your tax professional. It won't make the taxes go away, but it may help take the edge off the process.