Income tax is a percentage of an individual’s earnings. Income taxes are due to both the state and federal governments each year on April 15. The amount of tax an individual is required to pay is calculated by subtracting any permitted deductions from their income. The Internal Revenue Service (IRS) collects taxes.

Federal tax laws are based on the Internal Revenue Code (IRC). These laws include the rules and regulations regarding federal income tax. Almost all individuals or businesses that have earned an income are subject to these taxes.

Federal income tax applies to all individuals, including those who are not United States citizens, so long as they earned income from a source in the U.S. Income taxes are used to increase revenue necessary to operate the government as well as to offer services.

A large majority of individuals pay their income tax by having them withdrawn from their paychecks. Employers withhold a portion of their employee’s wages and send the amount to the IRS.

In some cases, the amount is not sufficient to cover the individual’s federal income tax liability. In those cases, the taxpayer must send a payment to the IRS by April 15. If an individual cannot pay the entire amount at once, they may inform the IRS and make payment arrangements.

What is Income Tax Law?

Income tax law is an area within finance law. It includes issues such as filing taxes and handling disputes with the IRS. 

What is a Final Tax Return?

If an individual passes away, they may still be required to file an income tax return. If the individual who passed away earned enough income prior to their death that requires the filing of a return, then a return must be filed.

In general, if the decedent did not earn much income in their final year, a federal income tax return may not be required. The minimum threshold, or standard deduction, changes every year. Gross income typically includes money, goods, or property the decedent received from any of the following sources:

  • Employment;
  • A pension;
  • Disability payments; 
  • IRAs; or
  • Retirement plans.

For individuals with larger incomes, a portion of their Social Security may also be taxable. Additionally, gross income includes any self-employment income.

Who Files the Final Tax Return?

The final tax return is filed by the individual who is responsible for the decedent’s affairs. This is typically the administrator or the executor, but may be any other person responsible for the decedent’s affairs.

What is an Executor or an Administrator?

An executor is an individual who manages and distributes a decedent’s estate after they pass away. An estate includes all of an individual’s belongings, property, or assets. The executor must also take care of any debts and other financial matters. 

The only difference between an executor and an administrator is the way they are appointed. An administrator fills the same role as the executor. An executor is named in the decedent’s will while an administrator is appointed by a probate court judge.

The executor’s duties may be broad and include a variety of tasks, depending on the estate involved. An executor is typically named in the decedent’s will. If they did not have a will or did not name an executor, the probate court will appoint an individual to the position. In most cases, it will be a family member or close friend of the decedent. In some cases, an individual may apply for the position if they wish to have it.

The executor is responsible for ensuring the decedent’s debts and taxes are paid. They then distribute the remaining assets to the beneficiaries. An executor has a fiduciary duty to act using a manner of good faith and impartiality to ensure the desires of the deceased are carried out to the extent possible.

It is not uncommon and perfectly acceptable for an executor or administrator to hire another professional to assist in the administration of the estate. For example, hiring an accountant or a financial attorney to assist in filing a final tax return is an excellent step to ensure the process is done correctly. If something is mishandled, it may cause an issue for a beneficiary if they cannot collect their inheritance.

What is Probate?

Probate is the legal procedure that governs the distribution of a deceased individual’s estate upon their death. The process takes place in a probate court. The probate court establishes the validity of a will, appoints or ensures an executor or an administrator is managing the estate, and ensures the property of the estate is distributed properly.

The probate process may vary by state, but generally includes the following steps:

  • If the decedent had a will, it typically names an executor. If it does not, the probate court will appoint an estate administrator;
  • The executor or administrator of the estate will start the process of estate management. This may include scheduling the probate hearing;
  • The probate hearing is the time in which the court will determine the validity of the will;
  • The executor or administrator will ensure all debts or taxes owed by the estate are satisfied; and
  • Any remaining assets or items described in the will will be distributed to the beneficiaries. If a will did not exist, it will be distributed in accordance with state law.

When is the Final Tax Return Due?

The final tax return due date is what the normal tax due date would be had the death not occurred. As noted above, taxes are due April 15 of each year.

For example, a decedent passed away on March 7, 2018. Their final tax return for the year 2018 would be due on April 15, 2019.

In general, only income that is constructively or actually received up to the date of the decedent’s death will be included in the final tax return. It is important to note that income tax which is not yet collected by the decedent prior to their death is taxed to the recipient. In other words, the decedent’s estate or the beneficiaries would be subject to tax on their inheritance.

Can Expenses Incurred After the Death of the Decedent be Deducted on the Final Tax Return?

Generally, no, expenses incurred after the death of the decedent cannot be deducted on the final tax return. These expenses are deducted by the estate or the individual who pays for these expenses.

An exception to this rule is for the payment of the decedent’s medical expenses within one year from the date of their death. If these expenses are deducted on the decedent’s final tax return, the estate or the individual who pays for them may not deduct them again.

Do I Need an Attorney to Help Me with My Tax Problems?

Yes, it is essential to have an experienced tax attorney to assist with any tax problems. Tax laws are extremely complex and are always changing. There is tax preparation software available but it cannot provide the level of service an attorney can. Additionally, it is often unable to handle complex tax situations. If you are unsure about how to handle a final tax return, a financial lawyer will be able to help every step of the way.