Smart tax moves to make after a loved one dies
Taxes can be a headache at any time. But dealing with filing your loved one’s final tax return while grieving their death can create a heady mix of anxiety and exhaustion. That familiar April 15 angst, combined with the toll of mourning someone you love, can take even the most organized, unflappable person by surprise.
Although filling out tax forms and itemizing deductions may be the last thing you want to think about, if you are the executor or administrator of the estate, you are responsible for all things tax-related.
Even if you’re in the depths of grief, it’s worth your time to take a breath, and dedicate some energy and thought to taxes as soon as possible. Or, get help from other family members if you feel overwhelmed—because a little bit of preparation in the weeks after your loved one’s death can save you money and stress down the road.
Here are some things you can do now to stay on top of the important details.
File a tax extension, if needed
If your loved one passed away shortly before taxes are due, you’ll need to get an extension from the IRS to give yourself ample time to get everything in order.
By filing for an extension, you’ll ensure that you are not missing any taxation deadlines, since you will not be able to complete your loved one’s tax returns at least until the probate process begins.
Once the extension is filed (or if your loved one’s death occurred well before April 15), you should have plenty of time to prepare. Filing taxes is one of the last steps in dealing with the estate—typically, you would file during the probate process or after it is completed.
Start gathering paperwork
Every probate process is different depending on your loved one’s home state and the specifics of their estate.
But you will likely need: your loved one’s Social Security card, previous tax returns, a copy of the will, and a copy of their death certificate. Collect these important documents and keep them in a safe place.
Keep track of medical bills
It’s common for there to be expensive outstanding medical bills immediately after a loved one’s death. Medical bills, along with other debts, will be paid with funds from the estate as part of the probate process.
If you are the executor, you will need to decide how to account for the medical expenses when taxes are filed. If medical bills are paid out of the estate within one year of your loved one’s death, they can be claimed as a special itemized deduction on the final 1040 form, for example.
Whether to claim this exemption is one of many questions it’s advisable to discuss with a tax attorney or a CPA. But for right now, getting organized is the most important thing. Make sure to keep all medical bills in a safe place with the other important documents.
When in doubt, consult the pros
One of the tax-related questions you may have right now might be about your inheritance. If you are concerned that your inheritance is going to get swallowed up by taxes, it’s best to consult a professional to discuss your options.
The federal government does not have an inheritance tax, so whether or not your inheritance is taxable depends on which state you are in, as well as the value of the inheritance.
There are only six states that impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rates on inheritances can range from 1% to 20% of the value of your inherited assets.
Of course, state laws are subject to change, and, even if you live in a state without an inheritance tax law, you might still be subject to tax implications from your inherited assets.
For example, if you inherit an income-producing property, this could affect your taxes even if the inheritance itself is not going to be taxed. In other words, anything you inherit which generates income will likely be taxed. The bottom line: consult an accountant or other tax professional to discuss the tax implications of anything you inherit.
Keep in mind, estates can take months or even years to settle, so be prepared to have patience during the process. And remember, as you take care of your loved one’s tax burden, you are completing the financial work they started before they died—an awesome responsibility.
It is not an easy task, but it’s a worthwhile one. The work you do now and the care you take with it can pay dividends well in the future, extending your loved one’s legacy for years to come.
You may be eligible for free bereavement support. Empathy can help with everything from funeral planning to estate administration, with step-by-step guidance and real-time expert support. Many people get free premium access to Empathy as a benefit with their life insurance claim. We partner with New York Life, Guardian Life Insurance Company, Bestow, Lemonade, and other leading carriers. When you make your life insurance claim, talk to your representative about whether Empathy is a benefit they offer.
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