Death and Taxes

0:01 Ralph: Have you recently lost a loved one? Navigating finances after a death can be overwhelming. You got so much on your mind. Well join me me today as I walk you through what needs to be done? Tax wise? When someone passes away. I've heard there are two certainties death and taxes. So we'll discuss that very topic today.

0:50 Welcome back to the show on this tax. Talk Thursday. Losing someone close to you as incredibly difficult. On top of grieving, you may need to handle financial and legal affairs for that person. Taxes are often the last thing on your mind. But folks, there are important tax filings that must be completed after someone passes away. today I'm going to guide you. Step-by-step through the tax implications. When someone dies. My goal is pretty simple today. I want to provide you clarity and equip you with actionable information to properly file taxes. On behalf of your deceased loved one. And hopefully take away a little stress. I was out walking with the dogs this morning.

1:30 I think I may have mentioned this. We have two German shepherd dogs. We have Piper, she's a female, about four years old. And we recently got Giovanni I guess recently about a year ago. His name is Giovanni. He's a male he's about two years old. well this morning's excitement. is, as we turned the corner on the farm here, a Fox jumped out and boy, it was all news to chase and after the Fox, so had a little excitement this morning. So I thought I'd pep us up before we get into this difficult topic . Now while I'm there. Don't forget to subscribe to our show. You can do that by going to askralphpodcast.com. You don't want to miss tomorrow's show folks. we're going to be talking about keeping your business and personal finances separate. We're going to dive into that and talk about the reasons for that and how to accomplish that.

2:13 Let's get into today's topic. When someone passes away taxes generally need to be filed for two separate entities. That is them as an individual. That was a time before they passed away and potentially for their estate. First an individual income tax return will need to be filed for the portion of the year that the person was still alive. That's really no different than filing taxes like you do every year. As the typical 1040 is completed reporting all their income, their deductions and credits. Up to the date of their death. And one difference is when you go to file this return, you're going to mark deceased across the top of the tax form. If you have somebody do that, they'll handle that for you. Now what you may have in addition to that is a second tax return.

2:56 That's what's called an estate tax return. That may need to be filed for the deceased person's estate. So basically when they pass away, Anything they have could potentially flow over into this, estate. This estate involves reporting income deductions and distributions made by the estate. After the date of death, the executor of the estate is responsible for filing this return. And here's the key. If the estate generates $600 or more of annual gross income. So one of the ways you can prevent having to do on an estate return is if you keep the income below $600. Now this return can be filed. Either own the calendar or fiscal year basis. And you use IRS 1041 for that.

3:39 Now let's talk through some steps to take regarding a deceased person's taxes. And these are kind of important. So I would encourage you to pay attention to these first thing. Obtain a legal appointment as executor or administrator of the estate. That gives you the legal authority to act on behalf of the deceased. It's really important. The second step is to gather a deceased person's records. One of the key things you want to look for is their prior tax returns. Oftentimes I'll have somebody come in. Who's lost a loved one. Asking me to handle their taxes. And I'll say to them, well it would be really helpful if I could find a prior to your tax return. Why is that important for a couple reasons? A lot of times at prior year tax return.

4:20 Is a good. A map to use to see what they may have had. You may not know about. Some of the accounts that they have in generally those things are reported on the tax return. So you want to locate any records or outstanding taxes owed by the deceased. Make sure they're up to date with all their filings. And also, like I said, it's a roadmap for what they might have that you may need to find. The third thing you want to do is notify the social security administration and other government agencies as to death. You want to make sure you stop any social security benefits. And cancel services like Medicare veteran's benefits. And I will tell you what I have found out, and this is rough. You lose somebody and sometimes social security will pay them inadvertently.

5:02 And let me just tell you folks be on the lookout for that, because social security will snatch that money back quickly. So if you're banking on that money in the deceased's bank account. Just pay attention to that. And like I said, on step four, you're going to file the final 1040 form. That's the individual tax return for the portion of the year before they passed away. You're going to calculate their income deductions, credits and taxes. They're just like a normal tax return. And this tax return is due. During the normal tax filing deadline here on April 15th. And you can always request an extension for that. So just think about it in terms of their normal tax return. As the executor, you want to pay any outstanding taxes owed by the deceased using their assets. That's why you're going to have access to their bank account.

5:45 One of the things that I recommend is if you have a loved one, who's getting close to that time. You may want to have them set up the bank account in both of your names. So then it makes it easier in this transitional period. The executor is responsible for paying the estate expenses before distributing assets to beneficiaries. And that's a key thing. Folks, you want to make sure if you're the executor of the estate. You want to make sure that you are paying all of the responsible debts and taxes and all that before you distribute any money to any of the beneficiaries. Now, one of the things you want to do. For most estate is a good idea to do this and that set up an estate bank account to deposit income and pay expenses during the estate settlement. If you've already become a joint owner on the decedent's checking account, you might not need to make this step, but you may end up getting some distributions that are going to be in the estate's name.

6:34 So you may have to do this. Now in order to do that, your bank's going to require you get what's called an employee. Identification number or commonly referred to as an EIN. It's really simple to do that. You go to irs.gov and click on apply for an EIN. And they'll issue an EIN for that estate. You'll need to know the name of the person. The date that they passed away and all that sort of thing. But you're going to need that in order to set up that bank account. So would highly recommend that. Now, if you find that the estate has more than $600 of income during the period, you're going to have to file. What's called a form 1041. That's an estate income tax return for any of the tax years. When the estate earned $600 or more.

7:15 Now with most of these. You close out this estate within a year. So there may only need to be one tax filing if it had more than $600 in income. But if you have a complex estate. This could certainly grow into a couple of year process. Now, while I'm talking about that. One of the important things you want to do, and I don't see this done as often as it should be. If you know who the beneficiaries of the estate are going to be. You're going to want to notify them right away and let them know, Hey, before you file your taxes this year. There is going to be a form K-1 that I'm going to get you. So don't rush out and file your tax returns until you hear from me. That might mean that they need to file an extension. So just make them aware of that because unfortunately, oftentimes I see it happen where the person's not aware that they're going to be getting this tax form from the estate.

8:04 And all of a sudden they already filed their tax returns and then they're going to incur additional money. To go pay somebody to file an amended return. And then the final step is upon final estate distribution. You file a closing 1041 reporting any final income and distributions. To beneficiaries. I know that was a lot of complex information. The key takeaway is both a final individual tax return and an estate income tax filing may be required when someone passes away. They're definitely going to need to file a final individual return. And depending upon if the estate has income, they may need to file an estate tax return. So as the executor, you've got to manage this overall process.

8:44 But thing is folks here don't hesitate to seek help from a tax professional. I deal with these things every day. And it's not a simple process. But I can help simplify it for you. So let's look at some actionable steps. So if you've recently lost a loved one, here are some action steps. You're going to be dealing with the grief of losing somebody. I know this is difficult. So if you've got an action item list, I think it'll make it a little bit easier. First on that list is locate the will and contact an attorney to start the probate process for appointing an executor. I don't think this is a thing you want to do on your own. And it depends on the complexity of the estate, but locate the will and contact an attorney to start the process. As I said before, you want to gather the tax records. Especially the past tax returns, of the deceased individual.

9:27 Those can be a roadmap for what that person. had, often times you might not have known about some of the accounts they may have they may have had a CD at a bank that you weren't aware of or an investment account. So that tax return can really be a menu or a roadmap to find those things. As I said before, You want to notify agencies like social security and financial institutions of the death. You may have to have death certificates to take to the bank or to the investment house and show them that information. As we said before, you want to calculate income and file that 1040 for the portion of the year that they were alive. You want to open up that bank account for the estate? Get that EIN number from the IRS.

10:08 And here's a key thing. Folks track the estate income and expenses. Your goal, to be honest is to keep it under $600. So you don't have to incur filing that additional 1041. And while I'm here, here's one thing you want to consider. I had a client in yesterday. His father had passed away last year. Six months prior to his father passing away, his mother had passed away. Now here's where the problem started. The father was a carpenter and he was a member of the carpenter's union. When he passed away, There was a death benefit paid out to the estate. Here's the reason it was paid out to the estate. And this is why you want to take a look at. Any account that you have, make sure you have not only one beneficiary.

10:50 But a second beneficiary. So in this particular case, This person passed away his beneficiary where his was his wife. But of course she had died six months earlier. So now all of a sudden we have the unfortunate situation where we had this final death benefit distribution paid to the estate. Now why is that a problem? The estate tax rate is much higher than the individual rate. So in this case, this particular person had a $6,000 distribution that had to go through the estate and they had to pay tax on that. Now, the other option we could have done is to send this out through K-1's to the members of the beneficiaries, but in this case this person hadn't alerted the beneficiary.

11:31 So we thought the best path was to just go ahead and have the estate pay it. But that's one of the things you want to pay attention to. So if you inherit something or if you have only a single beneficiary name that second beneficiary to. To avoid that. Now, getting back to our discussion, those action steps. The next thing you want to do as the executor, you want to pay any outstanding taxes owed by the deceased from the estate assets. And then finally distribute the inheritance to beneficiaries and provide them tax documentation. Again, this is something I think it will be very wise to consult with a tax advisor. A tax attorney to help you through this process. By taking proactive steps, you can properly handle tax obligations during this difficult time. And I get it. It's a difficult time.

12:11 Lean on your faith. Pray for wisdom and guidance through each of these steps. And remember, God is walking beside you're not doing this alone. Now, before we wrap up on remind all of our listeners to visit our podcast page, you can do that at askralphpodcast.com. There you can leave a review, share your thoughts, or even send us a message. And I love to get those messages. You might have an idea for a future show. You may say, Hey Ralph, why don't you talk about this? I would love to get those things from you. And while you're there. Make sure you join our email list to enter into our weekly $25 Amazon gift card drawing. If you're not a member, you can't win. So it's very important to do that. And if you've unfortunately experienced a loss and you want to talk to a professional, I'd be happy to meet with you.

12:55 Just go to my website. That's at askralphpodcast.com/store. And there you can schedule an appointment with me. Now while we're here. If you know, somebody who has lost someone or is dealing with this process, please do me a favor. Share this episode with them, because it can be a very good thing for them to listen to and to use as a roadmap for handling this difficult time. So if you know somebody that's lost someone. Maybe somebody, you know, is getting ready to lose someone like an elderly relative or something like that. Share this with them so that they can benefit from this information. So let's recap. Dealing with tax implications. After someone passed away can be complex. And emotional. That's just the truth.

13:36 I hope this overview has equipped you with an understanding of the required tax filings and actionable steps to take. That was my goal. Give you a roadmap of how to handle these things. So in closing, please visit our website. Like I said, at askralphpodcast.com for more resources on this topic. And many others. We've got a 300 plus episodes out there. Each of which has information that can help you change the dynamic of your financial situations. And I'll leave you with this tax laws are constantly changing. So connect with a professional. If you need guidance. And as I always say, friends, stay financially savvy. Keep seeking, godly wisdom in all areas of your life. And may God bless you. And enjoy the rest of your day today.