Decedent's final income tax returns.

Practical planning tips for the will's executor or the estate's administrator. hen an individual dies, someone usually is selected to act as his or her personal representative, either as an executor (if named in the decedent's will) or an administrator (if the taxpayer died without a will or failed to name an executor). It is this representative's duty to prepare and file a final federal income tax return for the taxpayer for the year of his or her death.

This final return covers the portion of the year during which the taxpayer was alive. For calendar-year taxpayers, it is due by April 15 of the year following the year of death.

FILING ISSUES

There are many issues a personal representative must consider in preparing and filing the decedent's final return.

Joint return. If there is a surviving spouse, he or she and the representative must determine whether a joint return can and should be filed. A joint return is permitted only if the decedent was married at death, the surviving spouse did not remarry, during the tax year and both taxpayers had the same tax year.

Savings bonds. As a rule, taxpayers choose when to report the interest from U.S. savings bonds--annually or deferred until the bonds are redeemed. If before death the taxpayer elected to include the annual increment in the value of the bonds as income, the increase in value in the year of death must be reported on the final return. If the taxpayer never made that election, the representative has a choice: Include all interest earned before death on the final return, report the interest earned before death on the estate income tax return or defer the income (with the heirs who cash the bonds at maturity reporting all past interest).

TYPES OF INCOME

Income through the date of death should be included on the final return using the same method of accounting the taxpayer used before death. For cash basis taxpayers, this means the income received and expenses paid prior to the date of death are reported on this final return.

Salary, wages and bonuses received before death (including uncashed checks) must be included on the final return; accrued or unpaid compensation (for example, vacation, sick pay, commissions, etc.) are taxable to the estate or heirs when actually received. Dividends and interest checks received before death also are included; if the taxpayer died after a dividend was declared but before the payment date, it is reported by the ultimate recipient.

DEDUCTIONS AND EXEMPTIONS

The general rules for deductions allowed to individuals also apply to a decedent's final return. Deductible items may be included if paid before death. A deductible item paid by a check not cashed as of death is deemed paid before death if the check is cashed eventually.

Medical expenses. A decedent's medical expenses paid before death are deductible on the final return if the amounts exceed 7.5% of the decedent's adjusted gross income. Other unreimbursed medical expenses paid within one year of death may be deducted either on the decedent's income tax return for the year incurred or on the estate tax return (but not on the estate income tax return). These expenses can be allocated between the two returns. If the medical expenses are deducted on the decedent's final income tax return, the representative must specifically waive the right to take these expenses on the estate tax return.

Charitable contributions. Contributions made in the decedent's final year should be deducted on the final income tax return. However, any excess carryovers are limited; a decedent's contribution carryover can be taken on the final return (subject to the appropriate percentage limits), but any further excess contribution amounts are lost.

REQUEST FOR PROMPT ASSESSMENT

Ordinarily, the Internal Revenue Service has three years from the date an income tax return is filed (or due, if later) to assess additional tax. After a final return has been filed, a taxpayer's representative may reduce this time to 18 months, by filing Form 4810, Request for Prompt Assessment Under Internal Revenue Code Section 6501(d).

For further discussion of these issues, see "Practical Planning for the Decedent's Final Return," by Alvin Lieberman and Claudia Kelley, in the October 1996 issue of The Tax Adviser:

--Nicholas Fiore, editor

The Tax Adviser