File That Final Tax Return – Five reasons death and a tax return makes sense

If a parent or loved one died this past year, you may wish to consider filing a final tax return even if not technically required to do so.

Background

When a deceased’s estate is more than the federal threshold of $5.45 million in 2016, an estate tax return is required. This limit requires only a small percentage of taxpayers to file an estate tax return. Filing requirements change if your state’s estate tax threshold is at a lower dollar amount.

Five reasons to file a final return

  1. Definitive notice to the IRS. When the death certificate is finalized, part of the process is to let Social Security know of a taxpayer’s passing. Eventually the IRS will be notified of the death. By filing a final tax return with the IRS, you are providing a direct notice of the death to the IRS. This should keep the IRS from sending you future notices for missing tax returns. It will also help alleviate automatic notices sent from the IRS for unreported earnings or mismatching 1099’s prior to the IRS receiving a death notice from Social Security.
  2. Withholdings and credits. Often though not required to file a tax return, the deceased is owed a refund. The only way to receive this refund is to file a tax return.
  3. Peace of mind. Sometimes even though a tax return is not required to be filed, doing so helps the survivors provide some closure. Remember the IRS can audit a prior tax year indefinitely if a tax return is not filed. By filing a final tax return the audit clock starts its 3-year time period.
  4. Capital gains and losses. Part of preparing an income tax return is the review of property sales. This process creates a summary of capital gain and loss activity for the year. Even if you decide not to file the tax return, you will have the information necessary to defend any IRS challenge of these capital transactions.
  5. Establishing basis. You will need to capture the fair market value of assets transferred to beneficiaries. This helps establish a valuation basis for the new owners. Beneficiaries will need this new value if they later sell inherited items.

If you have questions regarding your situation, please ask for help.

Published: 02/19/2016 12:00 PM