Health & Fitness
From The Lawyer's Desk: Federal Income Tax Issues for Decedents
Attorneys from Paule, Camazine and Blumenthal will post a weekly blog on legal topics of interest. To submit a topic please email: fromthelawyersdesk@pcblawfirm.com
By Barton E. Saettele of Paule, Camazine and Blumenthal, P.C.
Most people understand that individuals must pay federal income tax on the taxable income generated by their assets. For example, we have to pay federal income tax on the interest earned by our bank accounts. What some people might not know is that the taxable income generated by a decedent’s assets after death is still subject to federal income tax.
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Assets are oftentimes transferred at death via joint ownership or beneficiary designation. In these instances, the taxable income generated after death by an asset is simply reported on the federal income tax return of the recipient of the property. For example, if an individual receives a brokerage account from his or her deceased parent by way of beneficiary designation, the taxable income generated by the brokerage account after the parent’s death must be reported on the recipient’s federal income tax return.
Sometimes assets are owned by an estate or trust after death. In these instances, the post-death taxable income generated by an asset must be included on a federal income tax return filed by the estate or trust. For example, if after death a brokerage account is held by a decedent’s estate, the post-death taxable income generated must be reported on the estate’s federal income tax return. The form used in this situation is IRS Form 1041.
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Application of the above rules may seem simple, but in practice handling the federal income tax issues for a decedent is oftentimes more complex. For example, there can be complexity in making sure the taxable income generated by a particular asset is properly allocated between pre-death and post-death portions, and the details of properly completing final federal income tax returns for decedents and IRS Form 1041’s can be very complicated. Accordingly, it is often wise to consult with a professional tax advisor with regards to the proper handling of the federal income tax issues that apply when someone dies.