If a decedent earned income in the final year of life, filing final tax returns becomes mandatory. The  executor must file a final federal income tax return and a final state income tax return (if required) reporting all income earned by the decedent in the final year of life up until the day of death.

Usually, in a common estate, the executor will hire a tax professional, as recommended, to handle tax matters. However, this doesn’t exempt an executor from participating in the tax filing process. The executor should prepare the information needed by the tax professional. Otherwise, the tax professional will charge a substantial fee to handle all aspects of filing the final tax returns.

How to Prepare the Final Tax Returns

As explained in the article Track the Estate Income, income earned by the decedent in the final year of life up until the day of death requires reporting on the final tax returns. In addition, since most 1099’s will report income for the entire year, the executor may need to adjust the 1099’s. Therefore, the following steps are necessary for the executor to prepare the final tax returns accurately:

• Review the prior year returns to identify income sources used in the past.

• Review bank statements, brokerage statements, pay stubs or direct deposit statements, etc. to identify current income that needs reporting. If copies are not available to the executor, bank statements and other statements are available online through the financial institution. If the executor has no access to the account, the executor should call the institution and ask for the documents.

• Review any 1099’s received to see if the income reported is for the entire year.

• If the 1099’s reported income for the entire year, the executor must amend the income to show the amount earned only up until the day of death.

• Provide a report or spreadsheet showing the income amounts that need reporting on the final tax returns. Include other income types such as rental income if received by the decedent in the final year of life.

After identifying the income and making adjustments, send all the tax documents, reports, or spreadsheets to the tax professional.

Good Record Keeping is Essential to Accurate Tax Returns

As mentioned in the article Good Record Keeping : Crucial for an Executor, a good record keeping system is essential. Therefore, if the executor set up a good record keeping system at the beginning of the estate administration, preparing documents for the final tax returns becomes a simple task and will save the estate money. Otherwise, filing the estate tax returns will become a sizeable expense to the estate.

Was this article helpful? Do you understand how preparing the final tax returns can save the estate money? Share your comments or questions in the comment box below.

Recommended Reading

Tax Returns and the Date of Death

How to Report 1099 Income on the Final Return