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Flashcards in The Final Return (Decedent's Final Form 1040) Deck (31)
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1
Q

When is a filed return mandatory for a decedent person?

A

An income tax return must be filed for a decedent (a person who died) if the decedent met the filing requirements at the time of death. Should death occur during the filing season (i.e. Jan1-April 15) and before filing a prior year return, the normal deadline for filing 9usually April 15) applies to that return. The individual responsible for filing the return may be a surviving spouse relative, executor, administrator, or legal representative. This is not the final return, as the decedent was alive for several months into a new tax year.

2
Q

When is the final income tax return due?

A

The final income tax return is due at the same time the decedent’s return would have been due had death not occurred. A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred.

3
Q

True or False

If the decedent is married at the time death, the decedent and surviving spouse are consider married for the whole year for filing status purposes

A

Answer: True

4
Q

Can a surviving spouse who does not remarry before the end of the tax year in which the decedent died file a joint return with the decedent?

A

Answer: Yes

A surviving spouse who does not remarry before the end of the tax year in which the decedent died file a joint return with the decedent. If otherwise applicable, the return can include the full standard deduction based on the filing status for the decedent.

5
Q

What happens if the surviving spouse remarries during the year?

A

If the surviving spouse remarries during the year, they must file apart from the decedent. The decedent must file separately (MFS); however, the surviving spouse can file a joint return with the new spouse.

6
Q

Can a court-appointed personal representative revoke an election to file a joint return that the surviving spouse previously made alone?

A

Answer: Yes.

A court-appointed personal representative revoke an election to file a joint return that the surviving spouse previously made alone. the representative does this by filing a separate return for the decedent within one year from the due date of the return (including any extensions). the joint return made by the surviving souse will then be regarded as the separate return of that spouse by excluding the decedent’s items and refiguring the tax liability.

7
Q

Income to Include

How is the decedent’s income determined?

A

The decedent’s income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. All income the decedent would have received had death not occurred that was not properly includible on the final return is income in respect of a decedent (IRD) and taxable to the estate or person who receives it. The method of accounting used by the decedent also determines the income and expenses includible on the final return.

8
Q

What is Income in respect of a decedent?

A

All income the decedent would have received had death not occurred that was not properly includible on the final return and taxable to the estate or person who receives it. The method of accounting used by the decedent also determines the income and expenses includible on the final return.

9
Q

Income to Include (Continued)

The method of accounting used by the decedent also determines the income and expenses includible on the final return.

Method of accounting: Cash

A
  • The final return includes items actually or constructively received before death.
    1. The decedent constructively received interest from coupons on bonds if the coupons matured in the decedent’s final tax year but had not been cashed. Include the interest on the final return.
    2. Generally, the decedent constructively received a dividend if it was available for use by the decedent without restriction. If the corporation customarily mailed its dividend checks, the dividend was includible when received. If the individual died between the time the corporation declared the dividend and the time it arrived in the mail, the decedent did not constructively receive it before death. Do not include the dividend in the final return.
10
Q

Income to Include (Continued)

The method of accounting used by the decedent also determines the income and expenses includible on the final return.

Method of accounting: Accrual method

A

Generally, under an accrual method of accounting, report income when earned. If the decedent used an accrual method, only the income items normally accrued before death are included in the final return.

11
Q

Income to Include (Continued)

The method of accounting used by the decedent also determines the income and expenses includible on the final return.

Examples Cash Method and Accrual Method

A

Example I

Frank Johnson owned and operated an apple orchard. He used the cash method of accounting. He sold and delivered 1,000 bushels of apples to a canning factory for $2,000 but didn’t receive payment before his death. The proceeds from the sale are income in respect of a decedent. When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. When Frank’s widow collects the $2,000, she must include that amount in her return. It isn’t reported on the final return of the decedent or on the return of the estate.

Example II

Assume the same facts, except that Frank used the accrual method of accounting. The amount accrued from the sale of the apples would be included on his final return. Neither the estate nor the widow would realize income in respect of a decedent when the money is later paid.

12
Q

Income in Respect of a Decedent

Is the beneficiary responsible for paying taxes on assets paid in kind (i.e. traditional IRA’s)?

A

Answer: Yes

Certain types of property such as capital assets, receive a step-up in basis when included in the decedent’s estate and transferred to a beneficiary due to death. Other assets, for example, traditional IRAs, are transferred in-kind to the beneficiary and do not receive a basis adjustment. The beneficiary is responsible for paying tax on income from these assets. All income the decedent would have received had death not occurred that was not properly includible on the final return, discussed earlier, is income in respect of a decedent.

13
Q

Income in Respect of a Decedent

Income in respect of a decedent is included in the income of one of the following:

A
  • The decedent’s estate, if the estate receives it
  • The beneficiary, if the right to income is passed directly the Income in Respect of a Decedent pic 2beneficiary and he receives it
  • Any person to whom the estate properly distributes the right to receive it

The character of the IRD is the same as it would be to the decedent if her were alive. I the income would have been a capital gain to the decedent, it will be a capital gain to the taxpayer.

14
Q

True or False

If an executor filed an estate tax return (Form 706) for the decedent, the taxpayer who must include IRD in his gross income may be able to claim a deduction for the estate tax paid on that income

A

Answer: True

Example:

On February 1, George High, a cash method taxpayer, sold his tractor for $3,000 payable March 1 of the same year. His adj basis in the tractor was $2,000. George died on Feb 15, before receiving payment. the gain to be reported as income in respect of a decedent is the $1,000 difference between the decedent’s basis in the property and the sale proceeds. In other words, income in Respect of a Decedent is the gain the decedent would have realized had he lived.

Example II

Cathy O’Neil was entitled to a large salary payment at the date of her death. The amount was to be paid in five annual installments. The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. The payments are income in respect of a decedent. None of the payments were includible on Cathy’s final return. The estate must include in its income the two installments it received, and you must include in your income each of the three installments as you receive them.

15
Q

Medical Expense Deductions

Are medical expenses paid BEFORE death by the decedent deductible?

A

Answer: Yes

Medical expenses paid BEFORE death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. this includes expenses for the decedent, as well as for the decedent’s spouse and dependents.

16
Q

Medical Expense Deductions

What happens with medical expenses that were not paid before death?

A

Medical expenses that were not paid before death are liabilities of the estate and appear on the federal estate tax return (Form 706). If the estate pays medical expenses for the decedent during the one-year period beginning with the day after death, the executor may elect to treat all, or part of the expenses as paid by the decedent at the time the decedent incurred them. An executor making this election may claim all or part of the expenses on the decedent’s income tax return as an itemized deduction, rather than on the federal estate tax return (form 706)

17
Q

Loss Deductions

How are loss deductions handled?

A

A decedent’s net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent’s final income tax return. An unused net operating loss or capital loss is not deductible on the estate’s income tax return

18
Q

How are credits handled?

A

The individual filing a decedent’s tax return may claim any tax credits that applied to the decedent before death on the decadent’s final income tax return. Certain credits, like the EIC or the child tax credit, still apply even though the return covers a period of fewer than 12 months.

19
Q

Terrorist or Military Action Related Forgiveness

Terrorist or military action related forgiveness occurs when an individual meets both of the following criteria.

A
  • Is a member of the U.S. Armed Forces at death.
  • Dies from wounds or injury incurred while a member of the U.S. Armed Forces in a terrorist or military action
20
Q

Terrorist or Military Action Related Forgiveness (Continued)

In general forgiveness applies to:

A
  • The tax year death occurred, and
  • Any earlier tax year in the period beginning with the year before the year in which the wounds or injury occurred.

The beneficiary or trustee of the estate of a deceased service member doesn’t have to pay tax on any amount received that would have been included (had the servicemember not died) in the deceased member’s gross income for the year of death.

21
Q

Terrorist or Military Action Related Forgiveness (Continued)

Example:

A

Example:

Army Private John Kane died in 2021 of wounds incurred in a terrorist attack in 2020. His income tax liability is forgiven for all tax years from 2019 through 2021

22
Q

Filing the Return

Who signs the return?

A

If the court has appointed a personal representative, that person must sign the return. If it is a joint return, the surviving spouse must also sign it. If the court has not appointed a personal representative, the surviving spouse (on a joint return) signs the return and writes in the signature area “Filing as surviving spouse.” If the court has not appointed a personal representative and there is no surviving spouse, the person in charge of the decedent’s property must file and sign the return as “personal representative” A surviving spouse filing jointly with the decedent may submit a claim for refund by filing the return.

Write the word “DECEASED”, the decedent’s name, and the date of death across the top of the tax return.

23
Q

Leo, a single, calendar year taxpayer, died on February 23, 20X1. What is the due date of his final income tax return?

  • The final income tax return is due at the same time Leo’s return would have been due if he hadn’t died.
  • No later than 90 days from the date of death.
  • The due date is elected by the executor of the estate.
  • Because he died prior to April 15th of the current tax year, his final income tax return is due on April 15th of the current tax year.
A

Answer: A - The final income tax return is due at the same time Leo’s return would have been due if he hadn’t died.

EXPLANATION

The final income tax return is due at the same time the decedent’s return would have been due had death not occurred. A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred.

24
Q

A decedent’s final return is due?

  • By the 15th day of the 4th month after the date of the decedent’s death
  • By the 15th day of the 6th month after the date of the decedent’s death
  • Within 9 months after the date of the decedent’s death
  • April 15th following the year of the decedent’s death
A

Answer: D - April 15th following the year of the decedent’s death

EXPLANATION

The final income tax return is due at the same time the decedent’s return would have been due had death not occurred. A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred.

25
Q

A decedent’s final return may claim:

  • no tax credits, since the return covers a period of fewer than 12 months
  • prorated tax credits based on the decedent’s date of death
  • any tax credits that applied to the decedent before death
  • only tax credits that apply to a dependent of the decedent
A

Answer: C - EXPLANATION

The individual filing a decedent’s tax return may claim any tax credits that applied to the decedent before death on the decedent’s final income tax return. Certain credits, like the EIC or the child tax credit, still apply even though the return covers a period of fewer than 12 months.

26
Q

An individual taxpayer dies on March 12, 20x2 before filing his 20x1 income tax return. If the decedent met the filing requirements at the time of his death, the individual responsible for filing the decedent’s tax return should file:

  • decedent’s 20x1 tax return
  • decedent’s 20x2 tax return
  • decedent’s 20X1 and 20X2 tax return
  • since the taxpayer died, no tax return is due
A

Answer: C - decedent’s 20X1 and 20X2 tax return

EXPLANATION

An income tax return must be filed for a decedent (a person who died) if the decedent met the filing requirements at the time of his death. The individual responsible for filing the return may be a surviving spouse, relative, executor, administrator, or legal representative. 20x1 is not the decedent’s final return, as the decedent was alive for a few months into 20x2. 20x2 is the decedent’s final return.

Therefore, the individual responsible for filing the decedent’s tax return should file decedent’s 20x1 and 20x2 tax return.

27
Q

A decedent’s final return can include:

  • the full standard deduction based on filing status for the decedent
  • a prorated standard deduction based on filing status for the decedent and based on the decedent’s date of death
  • no standard deduction is allowed since the return covers a period of fewer than 12 months
  • only itemized deductions paid before death by the decedent are deductible
A

Answer: A - the full standard deduction based on filing status for the decedent

EXPLANATION

A decedent’s final return can include the full standard deduction based on filing status for the decedent.

Medical expenses that were not paid before death are liabilities of the estate and appear on the federal estate tax return (Form 706). If the estate pays medical expenses for the decedent during the one-year period beginning with the day after death, the executor may elect to treat all or part of the expenses as paid by the decedent at the time the decedent incurred them. An executor making this election may claim all or part of the expenses on the decedent’s income tax return as an itemized deduction, rather than on the federal estate tax return (Form 706).

28
Q

Medical expenses for a decedent paid after death:

  1. are liabilities of the estate and must be claimed on decedent’s estate tax return
  2. are liabilities of the estate and may be claimed on decedent’s estate tax return
  3. are deductible on decedent’s final return if paid during the one-year period after death and the estate elects to treat them as paid by the decedent
  4. are nondeductible
  • I
  • II
  • IV
  • II, III
A

Answer: D -II, III

EXPLANATION

Medical expenses that were not paid before death are liabilities of the estate and appear on the federal estate tax return (Form 706). If the estate pays medical expenses for the decedent during the one-year period beginning with the day after death, the executor may elect to treat all or part of the expenses as paid by the decedent at the time the decedent incurred them. An executor making this election may claim all or part of the expenses on the decedent’s income tax return as an itemized deduction, rather than on the federal estate tax return (Form 706).

29
Q

A net operating loss or capital loss that cannot be used on a decedent’s final return:

  • is deductible on the estate’s income tax return
  • is not deductible on the estate’s income tax return
  • is deductible on the estate tax return
  • can be used to file a claim for refund
A

Answer: B - is not deductible on the estate’s income tax return

EXPLANATION

A decedent’s net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent’s final income tax return. An unused net operating loss or capital loss on a decedent’s final return is not deductible on the estate’s income tax return.

DISCUSSION:

An estate tax return is one that is filed by the largest of estates. This is Form 706 and estates in excess of $11.18 m (in 2018) will file estate tax returns. Filing an estate tax return typically happens within a year of death, if the estate is large enough to require it.

An estate income tax return is filed when an estate, which comes in being after the death of a taxpayer, has income for the year in excess of $600. This is Form 1041. An example of an estate having income would be rents received from properties owned by an estate.

The following is a very general example of the two returns (does not account for all scenarios):

Joe dies in 2018. He has over $15 million in money and assets at death. An estate tax return (Form 706) could be required because his assets exceed the threshold of $11.18 million (2018).

Now it is 2019. Joe’s estate still has assets held in it. The estate is generating income from these assets. For any year that Joe’s estate continues to hold assets and generate income, the estate will file an annual tax return (Form 1041).

30
Q

Joe, a cash method taxpayer, died on August 22 and he received the following:

  • July rental income received August 1 $3,500
  • August rental income received September 1 $2,500
  • September rental income received August 15 $1,500
  • Dividend declared on August 10 and received on August 20 $4,000
  • Dividend declared on August 20 and received on August 30 $3,000
  • Dividend declared on August 30 and received on September 10 $2,000

What amount of income should Joe include on his final tax return?

  • $16,500
  • $14,500
  • $13,000
  • $9,000
A

Answer: D - $9,000

EXPLANATION

The decedent’s income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death.

The method of accounting used by the decedent also determines the income and expenses includible on the final return.

  • Cash methodThe final return includes items actually or constructively received before death.
    • The decedent constructively received interest from coupons on bonds if the coupons matured in the decedent’s final tax year but had not been cashed. Include the interest on the final return.
    • Generally, the decedent constructively received a dividend if it was available for use by the decedent without restriction. If the corporation customarily mailed its dividend checks, the dividend was includible when received. If the individual died between the time the corporation declared the dividend and the time it arrived in the mail, the decedent did not constructively receive it before death. Do not include the dividend in the final return.
  • Accrual method – Generally, under an accrual method of accounting, report income when earned. If the decedent used an accrual method, only the income items normally accrued before death are included in the final return.

Joe should include on his final tax return income of $9,000, calculated as follows:

$3,500July rental income received August 1

$1,500September rental income received August 15

$4,000Dividend declared on August 10 and received on August 20

$9,000Total income Joe received before he died on August 22

31
Q

Medical expenses for a decedent paid before death:

  • are nondeductible
  • can be claimed on the decedent’s estate tax return
  • can be claimed on decedent’s final return
  • can be claimed on either decedent’s final return or decedent’s estate tax return
A

Answer: C - can be claimed on decedent’s final return

EXPLANATION

Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. This includes expenses for the decedent, as well as for the decedent’s spouse and dependents.

DISCUSSION:

Medical expenses paid before death are only deductible on the decedent’s final income tax return (form 1040).

Expenses paid after death (and within one year of death), could be deductible on the decedent’s final return, or on the estate tax return (Form 706).

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