Most discussion about taxes and death involve the "estate tax." This is a tax imposed on certain assets usually given to others as an inheritance by a deceased individual. However, after a passing there are still other tax issues that surviving family members have to deal with, even if estate taxes are not a concern. For example, Kiplinger News published a helpful story last month that discusses the federal income tax issues faced after a death. The IRS demands a final accounting--an added stress for families dealing with an already stressful situation.
A final income tax return must be filed after one's passing. This task usually falls to an executor or administrator of an estate. However, if none are named then a surviving family member must deal with it. Figuring out what income needs to be included on that final tax return is not easy. Depending on when income is earned or received it may be included on the deceased's tax return or instead taxed as part of the estate. For example, interest earned on accounts is only considered income on the personal tax return up to the date of the passing. The interest that accrues after that date is taxed to either the beneficiary or the estate.
In general, actual monetary inheritances are not subject to the federal income tax. However, the article highlights one major exception--funds in IRAs, company retirement plans, like 401(k)s, and annuities. These funds are treated as "income in respect of a decedent" and taxed to the heir. Then again, Roth IRAs and Roth 401(k)s are an exception to the exception, with unique rules all their own.
It is easy to see how these tax issues can get quite complicated very quickly. Depending on other assets owned by the deceased, many other complex issues might arise when filing the last federal income tax return.
Ensuring these taxation and other "paperwork" issues are handled as smoothly as possible following a passing is one of the key goals of all New York estate plans. Families should be able to go through the grieving process at their own pace and in their own way. Worries about tax issues should not be an added stress. In our area, families are well served by visiting with a New York estate planning lawyer to ensure that they will have professional support throughout the entire process.
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