Taxes After Death: Who Is Responsible and What to Expect?

Summary

• When someone dies, their estate is responsible for paying any outstanding tax debt.
• The executor of the estate must file a final tax return and pay any taxes owed before distributing assets to heirs.
• Heirs do not inherit tax debt, but they may be responsible for taxes on inherited income or property.
• Surviving spouses may be responsible for their deceased spouse’s tax debt if they filed a joint tax return or live in a community property state.
• If there is no estate, the tax debt is uncollectible and will be written off by the IRS.
• Estate planning can help to minimize tax burdens for heirs and ensure that taxes are paid after death.
• It is important to consult with a tax professional or estate attorney for guidance on dealing with taxes after a loved one’s death.

Death and Taxes: Who Needs to Pay Taxes After You Die?

When you die, your estate must pay your taxes out of any assets you leave behind. However, if you don’t leave any assets, the estate is considered insolvent, and thus, the taxes are uncollectible. Tax debt does not pass to heirs, but if there are assets or income, the executor of the estate will need to deal with taxes.

Dealing with taxes after the loss of a loved one can be confusing and frustrating, especially at a time when emotions are high. This post outlines the basics so that you know what to expect. To get help now, contact us today at Timothy S. Hart Law Group.

Who Is Responsible for a Deceased Person’s Tax Debt?

The estate is responsible for a deceased person’s tax debt. The executor of the estate must ensure that the deceased person’s final tax return is filed if necessary, and they must also ensure that any taxes are paid prior to the distribution of the estate’s assets.

To give you a quick example, imagine that when Beth dies, she has $20,000 in a bank account, $100,000 in stocks, a car, and a home. She earned $50,000 during the current tax year.

The estate will file a final income tax return for Beth, using Form 1040. They will file the form just as they would have if she were still alive, but they will mark that she is deceased near the top of the form. Say the return shows that she owes $5,000. That bill, along with any other debts she has, will be paid out of the estate. Then, the remaining assets will pass to Beth’s heirs.

What if the estate executor or administrator does not pay the taxes?

If the executor fails to pay the taxes, they may be personally liable. If they don’t pay the taxes, the IRS or the state may use tax liens, wage garnishment, asset seizures, or other involuntary collection measures to collect the unpaid tax.

Do heirs inherit tax debt?

No, tax debt does not pass to heirs. Instead, it must be paid by the estate before the heirs receive their share of the estate. However, there are some exceptions.

For example, if someone owns real estate and there are unpaid property tax bills attached to the property, those bills must be paid. If the estate has no cash to pay the tax, it will need to be paid by whomever inherits the land. The county has the right to foreclose on the property due to the lien created by the property tax bills.

There are also cases where heirs may inherit income that requires a tax payment. In particular, if they inherit an IRA or a similarly tax-advantaged retirement account, those funds are considered taxable income. However, proper estate planning can help to minimize this tax burden for the heirs.

In particular, if dealing with retirement accounts, you need a named beneficiary on the account. Then, they can transfer the funds into an inherited IRA, which allows them to withdraw the funds at their own pace over 10 years. That spreads out the tax liability, compared to taking the full distribution all at once.

Are surviving spouses responsible for paying their late spouse’s tax debts?

A surviving spouse may be responsible for paying the tax debt if they are the executor of their late spouse’s estate. They are also personally responsible for any tax due shown on a jointly filed tax return.

For example, say that Mike and Karen file a joint tax return showing they owe $20,000. They set up an installment agreement to pay the tax bill over time. The following year, Mike dies. At this point, Karen is still responsible for paying the remaining tax debt.

Do you have to file jointly with your late spouse?

When you file a final income tax return for a deceased spouse, it may be filed jointly or as married filing separately. If filed jointly, the surviving spouse will be responsible for the tax debt, but if filed separately, the tax debt will be the responsibility of the estate. Again, if there is no estate, the tax will be uncollectible.

Can you claim innocent spouse relief after the death of a spouse?

In some cases, you may be able to get relief from your late spouse’s tax debt by filing for innocent spouse relief. Typically, to qualify, you must have not known about the tax debt, been coerced into signing a return, or meet other criteria. If you qualify, you will not be personally liable for tax debts due to your late spouse shown on a jointly filed return, but the estate will still be liable for the taxes if there is an estate.

How does tax debt affect spouses in community property states?

Note that the rules vary in community property states. For example, even if you file a separate return from your late spouse, you may still be responsible for their tax debt.

Tax Obligations After Death

As noted above, when someone dies, they may need to file a final income tax return. The filing requirements are the same as they are for a living person. If their income is over the standard filing deduction or if they meet other criteria such as having more than $400 in net self-employment income, the executor must file a final tax return on their behalf.

Estates may also need to file tax returns. If an estate has over $600 in income, its administrator or executor must file Form 1041, U.S. Income Tax Return for Estates and Trusts. Note that this is an income tax return, not an estate tax return.

For example, say that someone dies and they leave behind a rental property. While the estate is in probate, the renters continue to pay rent to the estate. The rent payments are income for the estate, and thus, the estate needs to report the income and pay tax accordingly. Some estates may also need to pay quarterly estimated tax.

Who needs to file an estate tax return?

If the value of the deceased person’s estate is over the estate tax filing threshold, the estate will need to file Form 706 (Estate Tax Return). As of 2024, the filing threshold is $13.99 million. If the estate is worth less than that, there is no need for an estate return unless the estate wants to transfer the deceased spousal unused exclusion (DSUE) to the surviving spouse.

For example, say that Frank dies in 2025 and his estate is worth $10 million. He is under the filing threshold for estate taxes, but to be on the safe side, his surviving spouse wants to port the DSUE to herself. She files a portability election to claim his unused estate tax exemption which will help to reduce any estate tax that her estate may incur after her death.

Note that the estate tax exemption was nearly doubled under the Tax Cuts and Jobs Act. This is set to expire in 2025. If the law is not extended or replaced, the estate tax exemption will revert to around $7 million for tax years 2026 and beyond.

What if there is no estate to pay tax debt?

If there is no estate, the tax is uncollectible, and the IRS will write it off. The IRS will not pursue heirs for tax debt except in situations where the heirs are legally responsible for the debt.

For example, as outlined above, surviving spouses are liable for taxes shown on a jointly filed return, even if the other party dies and even if there is no estate. If someone owns property with someone who dies, they will become responsible for any taxes due, related to that property.

Also, note that sometimes, relatively modest estates do not need to go through probate even if they have some assets. The rules vary from state to state, but in some states, your estate will not go through probate if you only have jointly held real estate and vehicles under a certain value. However, in this situation, if there was a tax lien prior to death and it was attached to the deceased person’s assets, the lien will continue to exist after their death.

Tax Planning and Prevention

The best time to prepare for taxes after death is when you are still alive. By being proactive, you can reduce your potential tax liability and protect your loved ones from unexpected issues.

Estate planning is a very specific part of the tax code, and you may want to consult with an estate attorney especially if you have significant assets. But even if you are not even remotely close to the estate tax exemption, you can benefit from doing some advanced planning.

From an organizational standpoint, make sure that someone knows how to access your financial records after your death. They should know where your will is, how to access your accounts, and where to find your old tax records.

Also, consider any assets that include tax obligations. For example, if you have $2 million in an investment account, your heirs will not face any taxes when those investments are liquidated and distributed. However, if you have a retirement account such as an IRA or 401(k) that includes pre-tax income, those distributions will be considered taxable income to your heirs. To reduce the burden, you should ensure these accounts have named beneficiaries. That allows the heirs to transfer the funds into their own IRAs, and then, they can withdraw the funds over the next 10 years to spread out the tax liability.

If you own real estate, try to keep the property taxes paid. Then, if you die, your heirs won’t have to deal with any unexpected tax bills attached to the land. Although it can be tempting to give real estate to your loved ones before you die, you may want to consult with an attorney before taking this route.

When you sell real estate, you will face capital gains tax if you earn money on the sale. The profit from the sale is the difference between the property’s basis and its sale price. The basis is the amount you bought the property for (plus major upgrades) or the value of the property on the day you received it. If you inherit property, your basis is the value on the day of inheritance. Thus, by giving away property before death, you may inadvertently increase the basis compared to waiting to distribute until you die.

Frequently Asked Questions (FAQs)

Is IRS tax debt forgiven at death?

No, when you die, all of your assets form your estate, and your estate must pay any taxes owed by you. However, if you die insolvent or without any estate, the taxes are uncollectible.

What is an inheritance tax?

Inheritance tax applies based on the value of assets that are inherited. The IRS does not impose an inheritance tax, but there is a state inheritance tax in Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rate and the rules vary from state to state, but often, the rate tends to be higher for distant relatives.

For example, in Nebraska, close relatives face an inheritance tax of 1% on anything over $40,000, while distant relatives face a tax of 13% on amounts over $15,000 and non-relatives are taxed at a rate of 18% on amounts over $10,000.

What is the difference between an estate tax and an inheritance tax?

An estate tax applies to the estate before the assets are distributed to heirs. An inheritance tax applies to amounts received by heirs after they have been distributed from the estate.

There is no federal inheritance tax, but there is a federal estate tax. Only five states have an inheritance tax (formerly, it was six states, but the inheritance tax was recently eliminated and phased out in Iowa), and 12 states plus the District of Columbia assess an estate tax. Maryland is the only state with both an estate and an inheritance tax.

Can the IRS take my inheritance if I owe back taxes?

Yes, if you personally owe back taxes and you inherit assets, the IRS may seize your inherited assets. If you have unpaid taxes, the IRS can issue a tax lien that attaches to all of your current and future assets. If you inherit something, the tax lien will attach to it, and that gives the IRS the right to seize that asset.

Can beneficiaries be liable for the estate tax?

No, the estate is liable for estate tax. However, if the estate does not have enough liquid assets to cover the estate tax, it may need to sell real estate or other tangible assets to cover the cost of the estate taxes, and thus, the benficiaries of the estate may not as inherit assets as anticipated.

Do you have to sell land to pay for taxes?

In situations where an estate owes more tax than it has in liquid assets, it may need to liquidate land or other assets. Similarly, if someone inherits land with property tax liens, they may need to sell part of the land so that they can pay the property tax if they don’t have any other funds to cover that tax.

However, beyond that, you generally do not need to sell real estate to cover taxes. However, if you sell the real estate, you will face capital gains tax on any gains incurred between the day you inherit the property and the day you sell it.

Get Help Today

If you have lost a loved one, we extend our deepest sympathies to you. To get guidance on dealing with taxes at this stage or for help planning, contact us today for a consultation.

At the Timothy S. Hart Law Group, we work closely with our clients to help them navigate complex tax laws and solve complicated tax problems.