Taxes When a Loved One Dies

The death of a family member brings grief, and it also brings a set of financial and tax obligations that must be handled correctly under strict deadlines. Understanding what returns need to be filed — and when — helps prevent costly mistakes during an already difficult time.

A final individual income tax return (Form 1040) must be filed for the year of death, covering income through the date of death. The return is due by the normal April 15 deadline (or October 15 with an extension) for the year of death. If the deceased was married, the surviving spouse can file a joint return for the year of death — often the most advantageous option, since it allows access to higher standard deductions and more favorable tax brackets. For the two years following the year of death, a surviving spouse with a qualifying dependent child may file as a "Qualifying Surviving Spouse," which preserves the same tax rates as married filing jointly.

If the estate has assets that generate income after death — rental income, dividends, interest, business income — the estate itself must file a Form 1041 (Fiduciary Income Tax Return) for each year it remains open. The estate is a separate taxpayer during administration, and the executor or trustee is responsible for filing and paying any taxes due. Income passed from the estate to the beneficiaries via the K-1 process is then taxed on the beneficiaries' personal returns, which is why beneficiaries may receive Schedule K-1 forms from the estate.

If the estate is large enough, it may owe federal estate tax. In 2024, the federal estate tax exemption is $13.61 million per individual ($27.22 million for married couples, using portability). Estates below this threshold owe no federal estate tax. If a federal estate tax return (Form 706) is required (or if the executor wants to claim portability of the unused exemption), it's generally due nine months after the date of death. Portability allows a surviving spouse to add the deceased spouse's unused exemption to their own, effectively doubling the amount they can pass on free of estate tax — but portability must be elected by filing Form 706, even if no estate tax is owed.

Beneficiaries who inherit assets receive a stepped-up basis to the fair market value at the date of death, which eliminates capital gains on appreciation that occurred during the decedent's lifetime. Beneficiaries who inherit retirement accounts face a different situation — those accounts don't receive a stepped-up basis, and distributions are taxable as ordinary income. IRAs with named beneficiaries pass outside probate and directly to those beneficiaries, while assets in a revocable trust also pass outside probate according to the trust terms. Proper beneficiary designation on retirement accounts and life insurance is one of the most important estate planning steps, since a missing or outdated designation can send assets through probate or to the wrong person entirely.