Most do not realize that after a loved one passes away, it’s typically the responsibility of the surviving spouse or representative to file a final tax return on their behalf. Filing taxes for a deceased person can be a complex and emotionally challenging task. However, it is essential to ensure that the decedent’s financial matters are properly handled. It’s also important to ensure their estate is settled in accordance with the law. In this article, we will guide you through the steps and considerations involved in filing taxes for a deceased person.
Who is responsible for filing the decedent’s tax return?
Filing a tax return for a deceased taxpayer is typically the responsibility of the deceased person’s executor or administrator, if one has been appointed. However, if the taxpayer was married, their spouse can file a joint tax return for the year they died. In this scenario, the surviving spouse will be able to claim the full standard deduction and use the married filing jointly tax bracket and tax rates.
If a court-appointed representative is handling the final tax return, they will need to attach a copy of the court document to the return. If a representative is handling a return, but not through the court, they need to include IRS Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, if they plan to claim a refund.
Who is responsible for paying the decedent’s taxes?
The executor or administrator is responsible for filing the deceased person’s final individual income tax return. Income will either be taxed on the final return, on the tax return of any beneficiaries who have earned income through the passing of the taxpayer, or on the estate or trust’s tax return.
Do I have to indicate on the return that the taxpayer is deceased?
It is important to indicate that you are filing a return for someone who is no longer living. If you are e-filing the return, the tax software you use should allow you to indicate this through a series of questions. If you are filing a paper tax return, you should simply print the word “deceased,” the deceased taxpayer’s name and their date of death on the top of the paper return.
How is income reported on a deceased person’s tax return?
Only income earned between the first day of the year and the date of death needs to be reported. For example, let’s say the deceased taxpayer held a saving’s that accrued interest. If they died on August 1, you only need to report the interest earned from January 1 to August 1. The interest earned from August 2 through December 31 may be taxable income to the beneficiary of the account. Alternatively, it can be considered taxable income to the estate if there is one.
Beneficiaries are typically not subject to income tax on money or property that they inherit. However, they are subject to taxation if the inherited asset earns interest or income. One exception, however, is money in a traditional IRA, employer-sponsored retirement plans like 401(k)s and 403(b)s, and annuities. These are treated as income and are taxed to the beneficiaries. The amount of time the account has been open also affects how it is taxed. If you inherit a Roth IRA or Roth 401(k), you won’t be taxed on inherited Roth distributions if the account has been open for at least five years at the time of death.
Keep in mind that for larger estates, it may be necessary to file an estate tax return. Some estates are subject to federal estate tax, depending on their net value. In 2023, estates valued at $12,920,000 or more are subject to this tax. There may also be state estate taxes to pay.
What if the decedent has debts that were left unpaid?
Generally, before distributing assets to heirs, the estate’s debts and taxes must be settled. These include funeral expenses, outstanding bills, and any taxes owed by the deceased person. However, the debt may go unpaid if the estate cannot cover the debts and there is no survivor who shared the responsibility of the debt.
Tax Help for Those Filing a Return for a Deceased Taxpayer
Filing taxes for a deceased person can be a daunting process. However, it’s a crucial step in settling their affairs and distributing their estate properly. Seeking professional guidance and being diligent in your record-keeping can help navigate this challenging task. It can also ensure that the deceased person’s financial matters are resolved in accordance with the law. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
While there is no guaranteed method of avoiding tax audits, there are things that could help trigger them. Since the Senate approved nearly $80 billion in IRS funding through the Inflation Reduction Act of 2022, with $45.6 billion specifically for enforcement, the IRS has promised an increase in tax audits. Below are some things that the IRS has historically viewed as “red flags,” which could increase the chances of an audit for taxpayers. But first, let’s review the different types of audits.
Types of IRS Audits
The IRS conducts different types of audits to review and verify taxpayers’ financial information and ensure compliance with tax laws. There are three primary types of IRS audits:
Correspondence Audits: These are the most common and least intrusive type of IRS audit. In a correspondence audit, the IRS requests specific documentation to support claims on their tax return. Typically, these audits are focused on one or a few specific issues, such as income, deductions, or credits. Taxpayers can respond to these audits by mail, providing the requested documentation and explanations.
Office Audits: An office audit, as the name suggests, takes place at an IRS office or a local IRS branch office. The IRS will contact the taxpayer to schedule a face-to-face appointment for the audit. The taxpayer will be required to bring the necessary records and documentation to the IRS office. Office audits are often more comprehensive than correspondence audits as they can cover a wider range of issues on a tax return.
Field Audits: Field audits are the most extensive and thorough type of IRS audit. In a field audit, an IRS agent comes to the taxpayer’s home or business to conduct the audit in person. These audits are usually reserved for more complex or high-risk cases. That said, they can involve a comprehensive review of a taxpayer’s financial records and activities. Field audits are often conducted when there are significant discrepancies or concerns about a taxpayer’s compliance with tax laws. However, note that the IRS has halted most unannounced visits to taxpayers.
Reporting a Business Loss
The IRS will be more inclined to audit a taxpayer who reports a net business loss, even if it’s small. Reporting losses year after year will only increase IRS interest in your tax returns. Remember, it is mandatory to report all earnings in a tax year. However, it might be helpful to reconsider which expenses should be deducted from your tax return. Reporting even a small profit could reduce the chance of being audited by the IRS.
Being Vague About Expenses
When it comes to expenses, the more detail the better. This is especially true when categorizing them on your return. Try to avoid listing expenses under “Other Expenses” as this will lead to more scrutiny from the IRS. It may even be helpful to provide supplemental documentation explaining why certain expenses drastically increased or decreased for that year. Doing so can give potential auditors a valid explanation for such occurrences and possibly avoid a tax audit. Additionally, rounding dollar amounts are red flags for the IRS. You should always use exact dollar amounts on your tax return.
Filing Late
Some taxpayers believe that filing late can actually decrease the risk of being audited. However, filing on time, as well as paying on time, can help establish a history of IRS compliance. This will be far more beneficial in the long run. In addition, not filing by the due date will also result in receiving your tax refund later if you are expecting one. Even worse, if your late filing triggers an audit, it may prompt the IRS to look at older tax returns you’ve filed. If they find any other errors, this can add additional time to their normal processing schedule.
Claiming Excessive Deductions
It is best to avoid any excessive expenses. For example, deducting the cost of your breakfast and lunch each workday may not be acceptable to the IRS. Excessive deductions for your donations to charitable organizations can also increase the chances of being audited. Inflating business expenses can result in being audited, especially if you try to claim large amounts for business entertainment or claim a vehicle that is used for only business purposes 100 percent of the time.
Now that home offices are more common, it’s important to only claim the home office deduction for the portion of your home that is used exclusively for business purposes. When claiming this deduction, you will need to figure out how much square footage in your home is dedicated to your business. For tax year 2023, the rate for the simplified square footage calculation is $5 per square foot, with a maximum of 300 square feet or $1,500. Excessive deductions claimed on your return are fast tracks to being audited by the IRS. That said, it’s best to only claim the deductions you actually qualify for to avoid owing any additional taxes.
Keeping Poor Records
Even the simplest tax situations require adequate records. If your finances are more complicated, then detailed records are necessary. Some taxpayers may feel inclined to estimate their expenses because they did not save receipts or documents, which the IRS views as a red flag. It’s important to make sure you have detailed records for the past three tax years at minimum. Having items like your previous tax returns, medical bills, business receipts, real estate documents, and investment statements can help substantiate your claims and avoid an IRS audit.
Choosing the Wrong Filing Status
Your filing status (single, married filing jointly, married filing separately or head of household) determines how you treat many tax decisions, such as what forms you’ll fill out, which deductions and credits you’ll take and how much you will pay (or save) in taxes. Select the wrong status, and it will trigger a cascade of mistakes–maybe even an audit. On top of that, if you decide to file jointly with your spouse, this means you’re responsible for any errors or deliberate falsehoods on your partner’s return, so make sure that you’re comfortable with what it says.
Tax Relief for Those Being Audited
The chances of being audited are low, but those chances increase when the IRS notices any of the above red flags. The audit process can be very stressful. It is a tedious process that requires collecting information regarding your income, expenses, and itemized deductions. Failing an audit can result in a huge, unexpected tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Remember, filing your taxes correctly the first time can help avoid interest, tax penalties, and additional taxes owed. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
The structure of modern families is changing. One of the most common developments is joint custody, where divorced or separated parents share the responsibilities of raising their children. This arrangement not only has a profound impact on the well-being of the children but also extends to various aspects of the parents’ lives, including their finances. In this article, we will explore how joint custody affects taxes and the key considerations parents need to be aware of to make informed financial decisions.
Right to Claim Child as a Dependent
When parents share joint custody of a child, the question of who can claim the child as a dependent on their tax return often arises. The IRS has specific rules to determine which parent is eligible to claim the child as a dependent. Typically, the custodial parent is the one who can claim the child, but exceptions exist.
The custodial parent is defined as the one with whom the child resides for the greater part of the year. However, if the child spends an equal amount of time with both parents, the parent with the higher adjusted gross income (AGI) is typically considered the custodial parent for tax purposes. In addition, the custodial parent may allow the non-custodial parent to claim the child as a dependent by filing IRS Form 8332, Release of Claim to Exemption for Child of Divorce or Divorce Parents. The non-custodial parent would then attach this form to their personal tax return.
Benefits of Being the Custodial Parent
The custodial parent earns the right to file as a head of household. This offers a higher standard deduction, lower tax rates, and higher tax bracket thresholds than those of a single filer. They may also claim the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and other tax credits and deductions.
Childcare Expenses
When parents share custody, they often share the cost of childcare. The parent who pays for childcare expenses can claim the Child and Dependent Care Credit. However, these expenses must necessary to allow them to work or look for work.
Education Expenses
When it comes to education expenses, such as tuition and related costs, the parent who claims the child as a dependent can usually claim education-related tax benefits. These include the American Opportunity Credit or the Lifetime Learning Credit. If both parents pay these expenses, it’s essential to have a clear agreement on how to share the tax benefits.
Only One Parent May Claim Their Child
When both parents claim a child as a dependent on their tax returns, it can lead to complications and potentially legal consequences. The IRS has specific rules to determine who is eligible to claim a child as a dependent. Claiming the same child on multiple tax returns is not allowed. Doing so can result in IRS audits, penalties and interest, and the need for amended returns.
Communication and Cooperation
The key to navigating the complexities of taxes in joint custody arrangements is open and transparent communication between both parents. It is crucial to have a written agreement or court order that outlines the financial responsibilities, tax arrangements, and the custody schedule.
Additionally, keeping detailed records of child-related expenses, such as medical bills, education costs, and childcare expenses, can be vital in case of an audit or if there is a dispute regarding who is entitled to claim certain tax benefits.
Tax Help for Parents with Joint Custody
Joint custody can significantly impact the tax situation of both parents. Understanding the rules and regulations that apply to dependents, tax credits, and deductions in such situations is crucial. It is advisable for parents to consult with a tax professional or attorney who specializes in family law to ensure they make informed decisions and fully leverage the tax benefits available to them. Clear communication and cooperation between co-parents can help make the financial aspect of joint custody arrangements as smooth as possible while ensuring the best interests of the children are met. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Tax season can be a stressful time for many individuals and businesses. Navigating the complex world of tax regulations, deductions, and credits can be overwhelming, and the consequences of making mistakes can be costly. That’s why many people turn to tax professionals for assistance. Choosing the right tax professional is crucial to ensure your financial affairs are in order and that you maximize your tax benefits. In this article, we will discuss the key factors to consider when selecting a tax professional.
Credentials and Qualifications
The first and most crucial step in choosing a tax professional is to check their credentials and qualifications. Look for individuals who have the necessary licenses and certifications to provide tax services. Common certifications include Certified Public Accountant (CPA), Enrolled Agent (EA), and tax attorney. These designations signify that the tax attorney has undergone extensive training and education, passed rigorous exams, and is up to date on tax laws and regulations.
Experience and Specialization
Every taxpayer’s situation is unique, and tax laws can vary significantly depending on your personal circumstances or business type. When choosing a tax professional, consider their experience and specialization. An expert who has dealt with similar situations is more likely to provide accurate and tailored advice. For instance, if you’re a small business owner, look for a tax professional with expertise in small business taxation.
Reputation and Reviews
Word of mouth is a powerful tool when it comes to selecting a tax professional. Ask friends, family members, or colleagues for recommendations. Additionally, you can read online reviews and check the Better Business Bureau for any complaints or disputes. A positive reputation is a strong indicator of a trustworthy and capable tax attorney.
Fees and Transparency
Tax professionals charge fees for their services, so it’s essential to understand their fee structure upfront. Some charge an hourly rate, while others offer a flat fee for specific services. Be wary of professionals who promise exceptionally large refunds or charge exorbitant fees based on a percentage of your refund, as this could be a red flag. A transparent and reasonable fee structure is a sign of a reputable tax professional.
Accessibility and Communication
Effective communication is key to a successful working relationship with your tax attorney. Ensure that the professional you choose is accessible and responsive to your inquiries and concerns. Discuss their preferred communication methods and availability during tax season. A tax professional who can explain complex tax concepts in a clear and understandable manner is a valuable asset.
Ethics and Integrity
Integrity and ethics should be non-negotiable when selecting a tax professional. Avoid anyone who encourages unethical or illegal tax practices, such as inflating deductions or hiding income. Ethical tax professionals adhere to the tax code’s rules and regulations and prioritize their clients’ financial well-being.
Technology and Tools
In the digital age, technology plays a significant role in tax preparation and filing. Consider whether your tax professional uses up-to-date tax software and tools to streamline the process and enhance accuracy. Electronic filing and secure document sharing should be part of their service offerings.
Long-Term Relationship
Building a long-term relationship with a tax attorney can be highly beneficial. A professional who understands your financial history and goals can provide more personalized advice and help you plan for the future. When choosing a tax professional, think about whether you envision working with them for years to come.
Tax Help for Those Looking for a Tax Professional
Selecting the right tax professional is a critical decision that can impact your financial well-being. By considering credentials, experience, reputation, fees, communication, ethics, technology, and the potential for a long-term relationship, you can make an informed choice. Remember that the right tax professional can provide peace of mind during tax season and help you navigate the complex world of taxes with confidence. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
The IRS issued warnings to businesses of a rise in Employee Retention Credit scams. Optima CEO David King and Lead Tax Attorney Philip Hwang provide helpful guidance on how to recognize the warning signs of an ERC scam and what to do if you’ve already fallen victim to one.
