The final “year of death” 1040 could be just the beginning. What estate executors and survivors need to know about retirement accounts, refunds, back taxes, liens and Form 1041.
By Kelly Phillips Erb, Senior Writer
It’s not just ordinary folks who mistakenly believe that death extinguishes any obligation to file or pay taxes. The misconception is so pervasive that even some tax practitioners repeat it—one recently advised a taxpayer to simply write “Deceased” on an IRS tax bill.
But in the competition between death and taxes, taxes have a longer life. There’s the final “year of death” 1040 tax return, possible estate or trust income tax returns, and all sorts of continuing issues involving retirement accounts, inherited asset basis, and an executor’s potential liability for unpaid taxes. Here’s what you need to know–and why you might need professional help.
After a taxpayer dies, the basic filing obligation depends on this question: Would the decedent have been required to file a federal income tax return if they had lived? If the answer is yes, a final Form 1040 generally needs to be filed. (If there’s a surviving spouse, this can be done on a joint return, as we explain below.)
The same types of income that would normally be reported on Form 1040 are reported on the final return. But timing is crucial. Income received or constructively received before death generally belongs on the final Form 1040. (Constructive receipt? That means a lot of things, including that the check was received, but not cashed, before someone died.)
Deductions should also be sorted by timing. The final return may include deductions properly attributable to the decedent before death, including medical expenses (but only to the extent qualifying expenses exceed 7.5% of adjusted gross income). In some cases, medical expenses paid by the estate after death can be treated as paid by the decedent.
Then there’s the tricky concept of income in respect of a decedent (IRD)—income earned or payable before death but not includible on the final return. IRD is just one reason even diehard do-it-yourselfers will likely want a pro to prepare that final year return and the estate’s income tax return (known as a 1041). IRD is taxed to the person or entity that receives it, typically the estate or an heir. It can include final wages, retirement account distributions, deferred compensation and accrued interest income.
One reason taxable IRD surprises survivors is that inherited capital assets–for example, stocks, real estate and collectibles–get a step up in basis to their current market value at the owner’s death. That means they can be sold right away with no capital gains due.
Not so for IRD assets.
Traditional retirement accounts are the classic IRD assets. These accounts hold income the decedent earned or accumulated but never paid income tax on. This is one of the most common surprises for surviving spouses and other beneficiaries: Distributions from an inherited traditional IRA may be fully taxable as ordinary income. (Generally, nonspouse beneficiaries of those who died in 2020 or later must drain these accounts within 10 years. We’ve got more details here.)
Note that if the owner of the account was required to take a distribution in the year of death, but hadn’t yet done it, that income doesn’t go on the final return. Instead, it goes on the return of the estate or the individual 1040s of the heirs–so if the heir is a spouse, it will go on the surviving spouse’s return whether it's a joint return or not.
Those savings bonds grandma had in her bank safe deposit box for years, accruing interest? That’s typically IRD, although the executor can elect to include the interest accrued up until the date of death in the final 1040 if it’s more advantageous–say, grandma had a lower tax rate than her heirs do.
Some IRD complications are of the paperwork variety. Banks, brokerage firms, tenants, retirement plan administrators, and other payors may continue reporting income under the decedent’s Social Security number even when the income really belongs to the estate, a trust, surviving joint owner, or beneficiary. That mismatch can trigger scary IRS notices.
Once the proper owner has been determined, income-producing assets should be retitled so future Forms 1099 report income to the correct taxpayer. If an account belongs to the estate, it should generally be titled in the estate’s name using the estate’s EIN, not the decedent’s Social Security number. (An EIN, is a unique tax ID for an estate or business. You can get one easily from the IRS–and there’s no charge.)
If the final Form 1040 shows a refund, the executor or surviving spouse must determine who is legally entitled to claim it. A surviving spouse filing a joint return for the year of death generally does not need to file Form 1310, but others may need it to establish their right to the refund.
Refunds for deceased taxpayers can be slow. The Taxpayer Advocate Service has identified deceased-taxpayer refunds as a recurring problem, including delays in processing returns filed with Form 1310. Keep copies of the return, Form 1310, death certificate, court papers, proof of filing, and IRS correspondence in case the refund is delayed or a refund trace is needed.
A surviving spouse can generally file a joint return with the decedent for the year of death if the normal joint-return requirements are met, and may also be able to file jointly for the immediately preceding year if the decedent died before that return was filed.
When a surviving spouse files jointly, they sign their own name and, as appropriate, sign for the deceased spouse. If a court-appointed personal representative (like an executor) files, the representative signs in that capacity and may need to attach proof of appointment.
Filing jointly might produce a lower tax bill, but it also means accepting joint and several liability. If the deceased spouse had unresolved issues involving unreported income, questionable deductions, unpaid estimated taxes, business income, cryptocurrency, or foreign accounts, the surviving spouse should think twice–and get professional advice–before filing a joint return.
Those unresolved tax issues sometimes come as a surprise to surviving spouses and other heirs. In fact, one of an executor’s basic jobs is to confirm whether earlier tax returns were filed, whether amended returns are needed, and whether there are open balances, audits, liens, or unresolved tax issues. If a decedent owed taxes, failed to file, or failed to pay, those liabilities don’t disappear at death.
The IRS doesn’t publish information on how many people die each year owing taxes, under audit, or being pursued for nonfiling. But the problem isn’t rare. In its latest Data Book, the IRS reported that as of the end of 2024 it had an inventory of 14.9 million delinquent accounts owing $208 billion. And those are just taxes already assessed.
An executor who pays other debts or distributes assets before satisfying federal tax claims may be personally liable for the shortfall. (The executor can apply under section 6905 for discharge from personal liability for the decedent’s income and gift taxes. That does not erase the tax, but it may protect the executor personally after the required process is followed.)
If an estate is insolvent, federal claims may have priority, and if the IRS has filed a federal tax lien against the decedent, the lien does not disappear at death. The executor will likely have to address it before selling, refinancing, or distributing the asset.
This is especially important with real estate, like a house. The IRS specifically notes that when real property of a deceased person’s estate is being sold, and the proceeds will not fully pay the tax liability, the estate may need to apply for a discharge of the remaining debt.
Property owned jointly can be particularly tricky because the lien attaches only to the delinquent taxpayer’s property and rights to property, as determined under state law. The form of ownership matters. For example, if a home is held in joint tenancy with right of survivorship (JTWROS), the decedent’s interest passes automatically to the surviving joint owner at death. But that does not mean a federal tax lien can be ignored. If the lien was attached to the decedent’s property rights during life, the executor or surviving owner should determine whether it continues to affect the property, whether a discharge is needed before sale, and whether state law changes the result at death.
With tenancy by the entirety (TBE)—a form of ownership available only to married couples in some states—the analysis is even more complicated. State law determines what rights each spouse has in the property, but federal law determines whether those rights are sufficient for a federal tax lien to attach. Even where state law protects TBE property from ordinary creditors of one spouse, the IRS may be able to attach the taxpayer-spouse’s rights in the property. If the taxpayer-spouse dies first, the effect of the lien may depend on state law, timing, and the nature of the rights that existed before death. For example, in Pennsylvania, the lien is extinguished by state law.
With tenancy in common (TIC), each co-owner has a separate interest in the property. If the decedent owned a one-half interest as a tenant in common, that interest does not vanish at death and does not automatically become the surviving co-owner’s property. It passes through the decedent’s estate, trust, will, or intestacy. The survivor may own their share free of the decedent’s tax debt, but the decedent’s share may still carry the IRS lien.
A decedent’s estate is a separate taxpayer. Form 1041 reports the estate’s post-death income, deductions, gains, losses, and distributions to beneficiaries, including interest, dividends, rents, business income, capital gains, retirement distributions, and administration expenses.
A domestic estate generally must file Form 1041 if it has gross income of $600 or more for the tax year or has a nonresident alien beneficiary. The return also helps determine whether income is taxed to the estate or taxed on beneficiaries’ tax returns and reported to them on Schedule K-1.
There’s also an important timing element. An estate’s tax year begins the day after death and can end on the last day of any month, as long as the first tax year does not exceed 12 months. So if someone dies on June 10, the estate’s first tax year begins June 11. The executor could choose a calendar year ending December 31, or the executor could choose a fiscal year ending May 31 of the next year, which would give the estate nearly a full 12-month first year.
What’s the advantage of that timing? If the estate distributes income and issues K-1s, beneficiaries generally report that income on their own returns for the year in which the estate’s tax year ends. An estate fiscal year can sometimes push beneficiary reporting into the following calendar year, resulting in tax deferral (who doesn’t want to pay a dollar tomorrow instead of a dollar today?).
Death does not end the income tax story, it only changes who is responsible for what comes next. The best approach is to be careful: gather the records, draw a clear line between pre- and post-death income, confirm ownership, and seek professional guidance when needed.
