Filing Taxes for Deceased Relative;

Financial Planning Tax Strategies
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A friend has asked for some help in understanding what to expect related to taxes for a relative who passed away last year, where he is the responsible person. I don’t have full knowledge of exactly what took place last year, but the general outline. So I thought I’d see if I could lay out some questions to help my understanding.

Basic situation – His sister passed away early in 2022. Not married and no will. He was the heir as her sole sibling. She left some possessions (home, possessions) and a traditional IRA. The IRA had no designated beneficiaries (or perhaps a designated beneficiary had deceased).

He worked with an attorney to do probate. This is in WA state, and he became the personnel representative as well as sole heir. Probate was initiated last year and I assume has closed, but don’t know that.

My understanding (guess) is that home and possessions were passed to the “estate” (he established an EIN for the estate). The home was sold and through probate, presumably, he received the proceeds. Other possessions were similarly either sold or given/thrown away. The IRA balance at a broker (let’s say $100,000 just for discussion here) was transferred to the estate. The IRA was fully “distributed” with 20% federal tax withheld, with the net proceeds eventually going to my friend through probate (I presume). He understood there may have been an option to spread that out over some years, but chose to take the full distribution.

The broker sent a 1099-R for the IRA distribution, showing the balance and taxes withheld. The “Recipient’s TIN” was the EIN for the estate. So it seems the IRA was distributed to the estate, with taxes withheld, and then through probate the net proceeds went to my friend. But that’s my layman’s description/understanding.

On the taxes … my friend has an appointment with a local IRS office to discuss things. He’s not sure what prior tax years have been filed (2021 was certainly not filed); they’ve guided him to file a Form 56 before coming in to authorize access to her tax information. Some questions:

– I assume he’ll have to file a 2021 individual return for her. He’s going to have to figure out how to get information on that. The brokers/banks he knows about may be able to provide 1099s previously sent? Does the IRS provide such information that has been sent to them?

– I assume he may have to file an individual tax return for the first part of 2022, assuming there were some dividends/interest in taxable accounts (not sure).

– What is the effect of the IRA distribution to the estate, with eventual transfer to him as the heir of the estate? Does that distribution feed into his personal tax return, even though the 1099 shows it going to the estate’s EIN? Is there an “estate income tax return” instead? (I see a Form 1041 exists for estate tax returns, but that seems to be when true estate taxes are due for large estates, which this is not).

– I assume the sale of the home should not be a tax issue, since the basis should jump at the date of death to then current value?

That’s enough for now. Appreciate any thoughts, but especially on the taxation of the IRA distribution.

Thanks.

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Yes. You can request a “tax transcript” from the IRS and it will include all income reported to them (W2, 1099, etc). By now they have all the 2021 info, the 2022 info may take a little longer.

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Lots going on here. Too many assumptions to give any solid advice.

One significant correction is that Form 1041 is not to pay the estate tax. That is Form 706. Form 1041 is the Income tax return for an estate or trust. The estate has some taxable income (at a minimum, the IRA distribution) so it must file an income tax return.

—Peter

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Thank you! Are the tax tables/brackets/rates the same as for an individual using a 1040? Or different? I’m curious if the tax hit will be bigger because the distribution went to the estate.

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No. The brackets are much MUCH smaller for a 1041. A fiduciary (which is a trust or an estate) gets to the top tax bracket very quickly - less than $20k of income. An individual needs a few hundred thousand of income before they get to that bracket.

–Peter

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If you distribute the income to the beneficiaries, the beneficiaries pay the tax at what will often be a lower rate. Definitely check with the estate’s accountant and the beneficiaries first though.

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MarkR, ptheland and blm - thank you again for your very helpful replies! No surprise from what I’ve seen here, but much appreciated.

Staying with just the IRA distribution topic, based on the above replies I found out more about the 1041 and the K-1 that reflects distribution to a beneficiary. I found this from Intuit:

“Distributions from an IRA are treated as ordinary income. Income to the estate from an IRA is reportable on Form 1041 line 8. However, this Distributable Net Income is typically passed through to the estate beneficiaries as Income in Respect of a Decedent and such income distributed to estate beneficiaries is reported to beneficiaries on Schedule K-1 (Form 1041) box 5 as Other Portfolio and Nonbusiness Income and taken as a deduction on Form 1041 line 18, so it ultimately does not get taxed at estate tax rates but is instead taxed at the beneficiaries’ marginal tax rates.”

(They then show the estate tax brackets, etc., which indeed would lead to very high taxes!)

Using my hypothetical $100,000 IRA distribution to the estate, with $20,000 withheld for federal tazes, all for the estate’s EIN, I’m not sure what should be filed if this were the only estate income.

  1. Is $100,000 is reported on Form 1041 line 8, with a note indicating it’s an IRA distribution from the IRA of the deceases?

  2. Should K-1 line 5 and 1041 line 18 show $100,000 distributed to the beneficiary? Or should it be the $80,000 actually received by the beneficiary?

  3. In either case, the amount to be taxed on the 1041 should be much lower than $100,000. Either $0 (if $100,000 was on the K-1) or $20,000 (if $80,000 was on the K-1).

  4. The estate has had $20,000 withheld for federal taxes. Does that mean the estate would receive a refund (either $20,000, or $20,000 minus tax owed)? Or does that tax withholding somehow transfer to the beneficiary for use in his personal tax filing? (I don’t see a way that would be entered anywhere.)

  5. If the refund does go to the estate in 2023, I assume that it would be distributed to the beneficiary in 2023, which would then require a 1041/K-1 in the filing early next year, with the estate income fully offset and the refund then distributed/taxed to the beneficiary. But this seems a little off to me also.

Sorry for the possibly simple questions, but I would like to have a basic understanding before reviewing things with him.

Thank you!