When a Texas resident passes away, there are several important tasks to handle, one of which is filing the deceased person’s final income tax returns. While this might seem like a complicated process, it is essential to understand what needs to be done in order to settle the estate correctly. Below, a Texas high net worth estate planning lawyer will explain the income tax returns that must be filed when a person dies, with a particular focus on the importance of these filings for Texas residents.
1. What Happens To Taxes When A Person Dies?
In Texas, when a person dies, they no longer need to file taxes as an individual. However, that doesn’t mean the IRS or the state is off the hook. The deceased person’s estate becomes responsible for handling their final tax obligations. In Texas, while there is no state income tax, the deceased’s federal tax responsibilities still need to be addressed. Any outstanding tax debts need to be settled before the person’s assets are distributed to heirs which is why financial planning is an important part of estate planning.
2. The Final Income Tax Return (Form 1040)
The most important income tax return to file after someone dies is the Form 1040, which is the same return they would file while alive but only covers the period from January 1st to the date of death.
Here’s how it works for Texas residents:
- Filing For The Year Of Death: The executor of the deceased person’s estate (the person appointed to manage the affairs after death) is responsible for filing this return for the year of death. If the person died in 2025, for example, the final return would cover the period from January 1, 2025, until the date of death.
- Who Files It?: The executor or personal representative of the estate must file this return. They will need to report all income that the deceased person received during the year, including wages, interest, dividends, rental income, and any retirement distributions. The final tax return will also include any deductions that the person was entitled to, such as medical expenses or charitable contributions, for the time they were alive.
Even though Texas doesn’t have a state income tax, the federal government still expects this return to be filed and taxes to be paid. The final income tax return is due by the regular filing deadline, which is typically April 15th of the year following the person’s death, unless an extension is granted.
3. The Estate Income Tax Return (Form 1041)
In addition to the final individual income tax return (Form 1040), Texas residents may also need to file an Estate Income Tax Return (Form 1041) if the estate generates income after the person’s death. This form is used to report income earned by the estate, such as rental income, interest, or business profits.
- When Is Form 1041 Required?: Form 1041 must be filed if the estate earns more than $600 in income. This could be income from investments, real estate holdings, or business activities. If the estate has no income, then Form 1041 isn’t needed.
- Who Files It?: The executor or personal representative of the estate also files Form 1041. This form is used to report any income that the estate earns after the person’s death. Texas residents should be aware that while Texas does not have a state income tax, this federal form must still be filed to fulfill the estate’s tax obligations.
The due date for Form 1041 is the 15th day of the 4th month following the end of the estate’s tax year. For most estates, this will align with the calendar year, but it depends on the estate’s fiscal year.
4. The Importance Of Filing Tax Returns After Death
Filing income tax returns after death is crucial for several reasons:
- Settling Debts: The IRS must be paid for any taxes owed before the assets of the estate can be distributed to the beneficiaries. In Texas, while there is no state income tax, the estate will still have federal tax responsibilities. If the necessary tax returns aren’t filed, the estate may be delayed, and beneficiaries may face difficulties in receiving their inheritance.
- Avoiding Penalties: Failure to file the required tax returns can lead to penalties and interest charges. In Texas, this could result in additional costs that diminish the value of the estate. It is important to ensure that tax returns are filed on time and that all income is accurately reported to avoid costly penalties.
- Determining Taxable Income: Filing the final return (Form 1040) and the estate income return (Form 1041) helps determine the final taxes due. This process ensures that all income, deductions, and credits are correctly accounted for, allowing the estate to settle its obligations.
5. Common Tax Issues After A Person Dies In Texas
There are several common tax-related issues that may arise after the death of a Texas resident:
- Deductions And Credits: Some deductions that were available while the person was alive, such as those for dependents or certain tax credits, will no longer apply after death. However, there may still be deductions for final medical expenses or charitable contributions made before death.
- Income After Death: If the estate generates income after the person’s death (such as rental income or dividends), it will be taxed separately. The executor may need to make quarterly estimated tax payments if the estate earns enough income to require them.
- Beneficiaries And Inheritance: Beneficiaries who inherit assets from the estate generally do not have to pay income tax on the inherited property. However, if they sell those assets in the future, they may be subject to capital gains taxes on any profits.
6. When To Seek Professional Help
Filing taxes after someone dies, especially when dealing with complex estates, can be difficult. Executors in Texas should consider seeking help from a tax professional or an attorney who specializes in estate planning, particularly since only an attorney can draft estate documents. This can help ensure that all tax returns are filed accurately and on time, preventing delays in distributing the estate and avoiding unnecessary tax penalties.
In conclusion, Texas residents must file the right income tax returns when someone dies in order to fulfill the deceased’s tax obligations and ensure that the estate is properly settled. By filing the final individual income tax return (Form 1040) and, if necessary, the estate income tax return (Form 1041), the executor will help to ensure that the estate’s tax responsibilities are met. Taking care of these filings is essential for both the smooth distribution of assets and the financial well-being of the heirs. Stuart Green Law, PLLC has been working on estate plans for families that protect their assets. We are licensed in Texas, Kentucky, Pennsylvania, and South Dakota, so contact us to get started today!