Decedent

A decedent is a person who has died, referred to in that capacity by law. IRS Publication 559 describes its readers as those in charge of "the property (estate) of an individual who has died (decedent)." The term identifies whose final tax return is being filed, whose property is being administered and distributed, and from whom heirs and beneficiaries acquire what they inherit. The tax code uses it in phrases such as "income in respect of a decedent" and "property acquired from a decedent," and probate courts use it for the person whose estate is before them.

Death splits one taxpayer into several. Up to the date of death, the decedent is an individual taxpayer like any other. After it, three different places take over the income and property. The IRS puts the dividing line plainly: "An estate is a taxable entity separate from the decedent and comes into being with the death of the individual." Income earned by the decedent up to and including the date of death goes on the decedent's final Form 1040, and income received after death goes on the estate's Form 1041, or on the return of the beneficiary who receives it directly.

The final return. The decedent's last individual return covers the part of the year before death. For someone who used the cash method, only items actually or constructively received before death belong on it. A surviving spouse can generally file a joint return for the year of death, because marital status is determined as of the date of death in that year. The filing mechanics, deadlines and who signs are covered on the final tax return page.

The estate's return. The estate is a new taxpayer with its own taxpayer identification number, and the personal representative chooses its tax year and accounting method on its first Form 1041. Every domestic estate with gross income of $600 or more for a tax year must file one, under IRS Publication 559. The estate exists for tax purposes until its assets are finally distributed.

Income in respect of a decedent. Some income the decedent had a right to but had not received at death, such as wages paid after death, uncollected sale proceeds, or the balance of a traditional IRA or 401(k), does not go on the final return. It is taxed to the estate or beneficiary who receives it, in the same way the decedent would have been taxed, and if it was also included in a taxable estate the recipient may get an income tax deduction for the estate tax paid on it.

What heirs receive, and its basis. Property passing from a decedent generally takes a basis equal to its fair market value at the date of death, the rule known as the step-up in basis, so appreciation during the decedent's life is not taxed when an heir later sells. Income in respect of a decedent is an exception: it carries no step-up.

Who acts for the decedent. A personal representative, in the IRS's words, is "an executor, administrator, or anyone who is in charge of the decedent's property." The representative's core duties are to collect the decedent's assets, pay the decedent's creditors and distribute what remains to the heirs or other beneficiaries, and also to file the decedent's final return, the estate's income tax returns, and an estate tax return where one is required. Some assets pass outside that process, such as accounts with a named beneficiary, jointly owned property and assets held in a living trust.

Sorting a decedent's year into the right places follows the date of death.

1. Fix the date of death. It is the dividing line for income, deductions and basis.
2. Before death: the final Form 1040. Wages, interest and other income the decedent received up to that date, plus deductions paid by then; medical expenses the estate pays within a year after death can, by election, be claimed there too.
3. After death: the estate's Form 1041, or the beneficiary's return for amounts paid to them directly, including income in respect of a decedent.
4. Value the assets at death to set the heirs' basis and to decide whether an estate tax return is needed.
5. Claim any refund due on the final return, using Form 1310 where the claimant is not a surviving spouse filing jointly or a court-appointed representative filing the original return with the court certificate attached.

For example: Dolores, who used the cash method, died on August 31. Her employer paid her $3,000 of salary on August 15, and that goes on her final return. Her last paycheck of $2,000, for work through her date of death, was paid on September 15 to her estate; it is income in respect of a decedent and goes on the estate's Form 1041. Her savings account was credited $150 of interest before she died and $90 after, so $150 goes on the final return and $90 on the estate's. She also owned shares that cost her $20,000 and were worth $50,000 on the date of death. Her daughter inherits them with a basis of $50,000, so if she sells them for $52,000 her gain is $2,000, not $32,000.

Pros

• The date of death gives a clear line between the decedent's income and the estate's.
• Inherited property generally takes a fresh basis at the date of death, which can eliminate tax on lifetime appreciation.
• The estate's separate taxpayer status lets income received during administration be taxed to the estate or passed out to beneficiaries.

Cons

• One person's year can require two or more returns: the final Form 1040, the estate's Form 1041, and sometimes an estate tax return.
• Income in respect of a decedent, including traditional IRA and 401(k) balances, gets no step-up and is taxed to the recipient.
• Information returns may report post-death income under the decedent's Social Security number, which then has to be sorted out between returns.
• The personal representative carries filing duties and can face penalties for missed deadlines.