Death and taxes—two topics that aren’t high on many people’s lists of favorite subjects. And yet, for just as many people, they will need to be handled together when a loved one passes away. One potential scenario is needing to resolve a loved one’s outstanding tax debt to the federal, and possibly state, government.
If you will be the estate administrator or executor of a family member or close friend, this responsibility will fall to you. Here’s what you need to know about paying tax debts on behalf of the deceased.
After a person’s death, their estate—their assets—will go into probate, the legal process by which assets are properly distributed to pay the deceased’s debts, taxes, and other valid claims before any remaining value is distributed to listed beneficiaries. The assets that go through probate include bank accounts, investments, real estate, home (sometimes), vehicles, etc. Assets that do not go through probate and can be paid directly to listed beneficiaries include IRAs, 401(k)s, brokerage accounts, and insurance plans.
We’ll focus on the process for paying any owed taxes.
The estate administrator is responsible for ensuring all income tax returns for the deceased are filed, including outstanding returns and the tax return for the year of death. Any income generated by assets after the day of death will be attributed to the deceased’s estate, which is treated as a separate entity from the person, with a different process for taxes and distribution to beneficiaries.
How do you know if or how much the person owed in income tax? The IRS can help! If you can’t find the answer in the deceased’s personal records, the IRS can provide you copies of previous tax returns. First, you’ll need to submit a request form and be able to provide:
- A copy of the death certificate
- The full name, address, and Social Security Number of the deceased
- A copy of Letters Testamentary (from the probate court) or a completed IRS Form 56 (Notice Concerning Fiduciary Relationship), along with a copy of the deceased’s will
Let’s say you discover after filling all outstanding tax returns that your loved one owed the federal government taxes—now what? The amount will need to be deducted from the deceased’s estate (those assets mentioned earlier). The IRS can file a Notice of Federal Tax Lien against the deceased’s home, vacation property, car, or other property in an attempt to pay off the owed taxes. The owed amount would be deducted from the proceeds of the property sale.
Overall, the good news is that beneficiaries and estate administrators aren’t on the hook to pay tax debts personally. Spouses can be the exception to this, but it depends on state laws. It is often worth the time and expense to consult with a tax specialist for detailed and complex tax and estate planning questions.Go to main navigation