US Internal Revenue Service: p559--1998

8/14/2019 US Internal Revenue Service: p559--1998

1/40

ContentsImportant Changes ............................ 1

Important Reminders ......................... 2

Introduction ........................................ 2

Personal Representatives ................. 2Duties .............................................. 2Fees Received by Personal

Representatives ....................... 3

Final Return for Decedent ................. 3Filing Requirements ........................ 4Income To Include .......................... 4Exemptions and Deductions ........... 5Credits, Other Taxes, and

Payments ................................. 6Name, Address, and Signature ...... 7When and Where To File ............... 7Tax Forgiveness for Deaths Due to

Military or Terroristic Actions ... 7Filing Reminders ............................. 8

Other Tax Information ....................... 8Tax Benefits for Survivors .............. 8Income in Respect of the Decedent 8

Deductions in Respect of theDecedent .................................. 11

Gifts, Insurance, and Inheritances .. 11Other Items of Income .................... 13

Income Tax Return of anEstateForm 1041 ....................... 14

Filing Requirements ........................ 14Income To Include .......................... 15Exemption and Deductions ............. 16Credits, Tax, and Payments ........... 18Name, Address, and Signature ...... 18When and Where To File ............... 18

Distributions to Beneficiaries Froman Estate ...................................... 18

Income That Must Be DistributedCurrently .................................. 19Other Amounts Distributed ............. 19Discharge of a Legal Obligation ..... 19Character of Distributions ............... 19How and When To Report .............. 20Special Rules for Distributions ....... 20Termination of Estate ..................... 21

Form 706 ............................................. 22

Comprehensive Example .................. 22

Final Return for Decedent ................. 23

Income Tax Return of anEstateForm 1041 ....................... 23

How To Get More Information .......... 24

Checklist of Forms and Due Dates .. 38

Worksheet To Reconcile AmountsReported ....................................... 39

Index .................................................... 40

Important ChangesEducation IRA. Beginning in 1998, an edu-cation individual retirement account (educa-tion IRA) can be established for the benefit

Departmentof theTreasury

InternalRevenueService

Publica tion 559Cat. No. 15107U

Survivors,Executors, andAdministrators

For use in preparing

1998 Returns


2/40

of certain individuals. For more informationon education IRAs, see Publication 590, In-dividual Retirement Arrangements (IRAs) (In-cluding Roth IRAs and Education IRAs).

Generally, the balance in the accountmust be distributed within 30 days after theindividual for whom the account was estab-lished reaches age 30, or dies, whichever isearlier. The treatment of the education IRAat the death of an individual under age 30depends on who acquires the interest in theaccount. If the decedent's spouse or otherfamily member is the designated beneficiary,the education IRA becomes that person'seducation IRA. If another person acquires theinterest, that person generally must include ingross income the earnings portion of the dis-tribution. If the decedent's estate acquires theinterest, the earnings on the account must beincluded on the final income tax return of thedecedent.

Roth IRA. Beginning in 1998, an individualmay be able to establish and contribute to anew individual retirement plan called a RothIRA. For information on these plans, seePublication 590.

If the Roth IRA owner withdrew an amountfrom a traditional IRA in 1998 and convertedit to the Roth IRA, any amount the ownermust include in income as a result of thewithdrawal is generally included ratably overthe 4-year period beginning with 1998. If theowner dies during that 4-year period, anyamount not previously reported must be in-cluded on the decedent's final return unlessthe owner's surviving spouse receives theentire interest in all the owner's Roth IRAsand chooses to continue reporting it ratably.

Partnership income. For partnership taxyears beginning after 1997, the partnership'stax year closes for a partner who dies. Thedecedent's distributive share of partnershipitems for that tax year is reported on the de-cedent's final return. For the treatment ofpartnership items from a partnership with atax year beginning before 1998, see IncomeTo Includeunder Final Return for Decedent.

Interest on estate tax. No deduction is al-lowed for interest paid on certain installmentpayments of the estate tax. This applies toestates of decedents dying after 1997.

65-day rule for estates. For tax years be-ginning after August 5, 1997, the personalrepresentative can elect to treat distributionspaid or credited by the estate within 65 daysafter the close of the estate's tax year ashaving been paid or credited on the last dayof that tax year.

Distributable net income. For purposes ofdetermining distributable net income of theestate, the separate shares rule may apply ifthere is more than one beneficiary. This ruleapplies to estates of decedents dying afterAugust 5, 1997. For more information, seeDistributions Deduction, later.

Important Reminders

Medical savings accounts. The treatmentof a medical savings account (MSA) at thedeath of the account holder depends on who

acquires the interest in the account. If thedecedent's spouse is the designated benefi-ciary of the account, the account becomes thespouse's MSA. If another beneficiary (includ-ing a spouse that is not the designated ben-eficiary) acquires the interest, that persongenerally must include in gross income thefair market value of the assets in the account.If the decedent's estate acquires the interest,the fair market value of the assets in the ac-count is included on the final income tax re-turn of the decedent.

Accelerated death benefits. Certain pay-ments received under a life insurance con-tract on the life of a terminally or chronicallyill individual before the individual's death (anaccelerated death benefit) can be excludedfrom income. For more information, see thediscussion under Income To Include, underFinal Return for Decedent, later.

Consistent treatment of estate and trustitems. Beneficiaries must generally treat es-tate items the same way on their individualreturns as they are treated on the estate'sreturn.

Estates and beneficiaries treated as re-lated persons for disallowance of certainitems. An estate and a beneficiary of thatestate are treated as related persons. Vari-ous tax provisions are affected by thischange, including the one that denies a de-duction for a loss on the sale of an asset be-tween the parties. This does not apply to asale or exchange made to satisfy a pecuniarybequest.

Individual taxpayer identification number(ITIN). The IRS will issue an ITIN to a non-resident or resident alien who does not haveand is not eligible to get a social securitynumber (SSN). To apply for an ITIN, file FormW-7 with the IRS. It usually takes 30 days toget it.

An ITIN is for tax use only. It does notentitle the holder to social security benefitsor change the holder's employment or immi-gration status under U.S. law.

IntroductionThis publication is designed to help those incharge of the property (estate) of an individualwho has died. It shows them how to completeand file federal income tax returns and pointsout their responsibility to pay any taxes due.

A comprehensive example, using taxforms, is included near the end of this publi-cation. Also included at the end of this publi-cation are:

1) A checklist of the forms you may needand their due dates, and

2) A worksheet to reconcile amounts re-ported in the decedent's name on infor-mation Forms W2, 1099INT,1099DIV, etc. The worksheet will helpyou correctly determine the income toreport on the decedent's final return andon the returns for either the estate or abeneficiary.

Useful ItemsYou may want to see:

Publication

950 Introduction to Estate and GiftTaxes

Form (and Instructions)

1040 U.S. Individual Income Tax Return

1041 U.S. Income Tax Return for Es-tates and Trusts

706 United States Estate (andGeneration-Skipping Transfer)Tax Return

See How To Get More Information, nearthe end of this publication for informationabout getting these publications and forms.

PersonalRepresentativesA personal representative of an estate is

an executor, administrator, or anyone who isin charge of the decedent's property. Gener-ally, an executor (or executrix) is named ina decedent's will to administer the estate anddistribute properties as the decedent has di-rected. An administrator (or administratrix)is usually appointed by the court if no willexists, if no executor was named in the will,or if the named executor cannot or will notserve.

In general, an executor and an adminis-trator perform the same duties and have thesame responsibilities.

For estate tax purposes, if there is no ex-ecutor or administrator appointed, qualified,and acting within the United States, the termexecutor includes anyone in actual or con-structive possession of any property of the

decedent. It includes, among others, the de-cedent's agents and representatives; safe-deposit companies, warehouse companies,and other custodians of property in thiscountry; brokers holding securities of the de-cedent as collateral; and the debtors of thedecedent who are in this country.

Because a personal representative for adecedent's estate can be an executor, ad-ministrator, or anyone in charge of the dece-dent's property, the term personal represen-tative will be used throughout thispublication.

DutiesThe primary duties of a personal represen-

tative are to collect all the decedent's assets,pay the creditors, and distribute the remainingassets to the heirs or other beneficiaries.

The personal representative also must:

1) File any income tax return and the estatetax return when due, and

2) Pay the tax determined up to the dateof discharge from duties.

Other duties of the personal representative infederal tax matters are discussed in othersections of this publication. If any beneficiaryis a nonresident alien, get Publication 515,Withholding of Tax on Nonresident Aliens andForeign Corporations, for information on the

Page 2


3/40

personal representative's duties as a with-holding agent.

Penalty. There is a penalty for failure tofile a tax return when due unless the failureis due to reasonable cause. Relying on anagent (attorney, accountant, etc.) is not rea-sonable cause for late filing. It is the personalrepresentative's duty to file the returns for thedecedent and the estate when due.

Identification number. The first action youshould take if you are the personal represen-

tative for the decedent is to apply for anemployer identification number (EIN) forthe estate. You should apply for this numberas soon as possible because you need toenter it on returns, statements, and otherdocuments that you file concerning the estate.You must also give the number to payers ofinterest and dividends and other payers whomust file a return concerning the estate. Youmust apply for the number using Form SS4,Application for Employer Identification Num-ber. Generally, it takes about 4 weeks to getyour EIN. However, you can apply by phoneand get it immediately (you still need FormSS-4). See the form instructions for how toapply.

Payers of interest and dividends report

amounts on Forms 1099 using the identifica-tion number of the person to whom the ac-count is payable. After a decedent's death,the Forms 1099 must reflect the identificationnumber of the estate or beneficiary to whomthe amounts are payable. As the personalrepresentative handling the estate you mustfurnish this identification number to the payer.For example, if interest is payable to the es-tate, the estate's identification number mustbe provided to the payer and used to reportthe interest on Form 1099INT, Interest In-come. If the interest is payable to a surviving

joint owner, the survivor's identification num-ber must be provided to the payer and usedto report the interest.

The deceased individual's identifyingnumber must not be used to file an individual

tax return after the decedent's final tax return.It also must not be used to make estimatedtax payments for a tax year after the year ofdeath.

Penalty. If you do not include the em-ployer identification number on any return,statement, or other document, you are liablefor a penalty for each failure, unless you canshow reasonable cause. You are also liablefor a penalty if you do not give the employeridentification number to another person, or ifyou do not include the taxpayer identificationnumber of another person on a return, state-ment, or other document.

Notice of fiduciary relationship. The termfiduciary means any person acting for an-other person. It applies to persons who havepositions of trust on behalf of others. A per-sonal representative for a decedent's estateis a fiduciary.

If you are appointed to act in any fiduciarycapacity for another, you must file a writtennotice with the IRS stating this. Form 56,Notice Concerning Fiduciary Relationship,can be used for this purpose. The in-structions and other requirements are givenon the back of the form.

Filing the notice. File the written notice(or Form 56) with the IRS service centerwhere the returns are filed for the person (orestate) for whom you are acting. You shouldfile this notice as soon as all of the necessary

information (including the employer identifi-cation number) is available. It notifies the IRSthat, as the fiduciary, you are assuming thepowers, rights, duties, and privileges of thedecedent, and allows the IRS to mail to youall tax notices concerning the person (or es-tate) you represent. The notice remains ineffect until you notify the appropriate IRS of-fice that your relationship to the estate hasterminated.

Termination notice. When you are re-lieved of your responsibilities as personalrepresentative, you must advise the IRS officewhere you filed the written notice (or Form56) either that the estate has been terminatedor that your successor has been appointed.If the estate is terminated, you must furnishsatisfactory evidence of the termination of theestate. Use Form 56 for the termination noticeby completing the appropriate part on theform and attaching the required evidence. Ifanother has been appointed to succeed youas the personal representative, you shouldgive the name and address of your succes-sor.

Request for prompt assessment (charge)of tax. The IRS ordinarily has 3 years fromthe date an income tax return is filed, or its

due date, whichever is later, to charge anyadditional tax that is due. However, as a per-sonal representative you may request aprompt assessment of tax after the return hasbeen filed. This reduces the time for makingthe assessment to 18 months from the datethe written request for prompt assessmentwas received. This request can be made forany income tax return of the decedent and forthe income tax return of the decedent's es-tate. This may permit a quicker settlement ofthe tax liability of the estate and an earlierfinal distribution of the assets to the benefi-ciaries.

Form 4810. Form 4810, Request forPrompt Assessment Under Internal RevenueCode Section 6501(d), can be used for mak-ing this request. It must be filed separately

from any other document. The request shouldbe filed with the IRS office where the returnwas filed. If Form 4810 is not used, you mustclearly indicate that it is a request for promptassessment under section 6501(d) of theInternal Revenue Code. You must identify thetype of tax and the tax period for which theprompt assessment is requested.

As the personal representative for the de-cedent's estate, you are responsible for anyadditional taxes that may be due. You canrequest prompt assessment of any taxes(other than federal estate taxes) for any openyears for the decedent, even though the re-turns were filed before the decedent's death.

Failure to report income. If you or thedecedent failed to report substantial amounts

of gross income (more than 25% of the grossincome reported on the return) or filed a falseor fraudulent return, your request for promptassessment will not shorten the period duringwhich the IRS may assess the additional tax.However, such a request may relieve you ofpersonal liability for the tax if you did not haveknowledge of the unpaid tax.

Request for discharge from personal li-ability for tax. An executor can make awritten request for a discharge from personalliability for a decedent's income and gift taxes.The request must be made after the returnsfor those taxes are filed. For this purpose anexecutor is an executor or administrator that

is appointed, qualified, and acting within theUnited States.

Within 9 months after receipt of the re-quest, the IRS will notify the executor of theamount of taxes due. If this amount is paid,the executor will be discharged from personalliability for any future deficiencies. If the IRShas not notified the executor, he or she willbe discharged from personal liability at theend of the 9-month period.

CAUTION

!Even if the executor is discharged, theIRS will still be able to assess tax

deficiencies against the executor tothe extent that he or she still has any of thedecedent's property.

Form 5495. Form 5495, Request forDischarge from Personal Liability UnderInternal Revenue Code Section 6905, can beused for making this request. If Form 5495 isnot used, you must clearly indicate that therequest is for discharge from personal liabilityunder section 6905 of the Internal RevenueCode.

Insolvent estate. Generally, if a decedent'sestate is insufficient to pay all the decedent'sdebts, the debts due the United States mustbe paid first. Both the decedent's federal in-come tax liabilities at the time of death andthe estate's income tax liability are debts duethe United States. The personal represen-tative of an insolvent estate is personally re-sponsible for any tax liability of the decedentor of the estate if he or she had notice of suchtax obligations or had failed to exercise duecare in determining if such obligations existedbefore distribution of the estate's assets andbefore being discharged from duties. The ex-tent of such personal responsibility is theamount of any other payments made beforepaying the debts due the United States, ex-cept where such other debt paid has priorityover the debts due the United States. Theincome tax liabilities need not be formallyassessed for the personal representative to

be liable if he or she was aware or shouldhave been aware of their existence.

Fees Received byPersonal RepresentativesAll personal representatives must include intheir gross incomes fees paid to them froman estate. If paid to a professional executoror administrator, self-employment tax alsoapplies to such fees. For a nonprofessionalexecutor or administrator (a person serving insuch capacity in an isolated instance, suchas a friend or relative of the decedent), self-employment tax only applies if a trade orbusiness is included in the estate's assets,the executor actively participates in the busi-ness, and the fees are related to operationof the business.

Final Returnfor DecedentThe personal representative (defined earlier)must file the final income tax return of thedecedent for the year of death and any re-turns not filed for preceding years. A survivingspouse, under certain circumstances, mayhave to file the returns for the decedent. SeeJoint Return, below.

Page 3


4/40

Return for preceding year. If an individualdied after the close of the tax year, but beforethe return for that year was filed, the returnfor the year just closed will not be the finalreturn. The return for that year will be a reg-ular return and the personal representativemust file it.

Example. Samantha Smith died onMarch 21, 1998, before filing her 1997 taxreturn. Her personal representative must fileher 1997 return by April 15, 1998. Her finaltax return is due April 15, 1999.

Filing RequirementsThe gross income, age, and filing status of adecedent generally determine whether a re-turn must be filed. Gross income usuallymeans money, goods, and property an indi-vidual received on which he or she must paytax. It includes gross receipts from self-employment minus any cost of goods sold. Itdoes not include nontaxable income. In gen-eral, filing status depends on whether thedecedent was considered single or marriedat the time of death. See Publication 501,Exemptions, Standard Deduction, and FilingInformation.

RefundA return should be filed to obtain a refund iftax was withheld from salaries, wages, pen-sions, or annuities, or if estimated tax waspaid, even if a return is not required to befiled. Also, the decedent may be entitled toother credits that result in a refund. Theseadvance payments of tax and credits arediscussed later under Credits, Other Taxes,and Payments.

Form 1310. Generally, a person who isfiling a return for a decedent and claiming arefund must file a Form 1310, Statement ofPerson Claiming Refund Due a DeceasedTaxpayer, with the return. However, if theperson claiming the refund is a surviving

spouse filing a joint return with the decedent,or a court-appointed or certified personalrepresentative filing an original return for thedecedent, Form 1310 is not needed. Thepersonal representative must attach to thereturn a copy of the court certificate showingthat he or she was appointed the personalrepresentative.

Example. Assume that Mr. Green diedon January 4, 1998, before filing his tax re-turn. On April 3 of the same year, you wereappointed the personal representative for Mr.Green's estate, and you filed his Form 1040showing a refund due. You do not need Form1310 to claim the refund if you attach a copyof the court certificate showing you were ap-pointed the personal representative.

Nonresident AlienIf the decedent was a nonresident alien whowould have had to file Form 1040NR, U.S.Nonresident Alien Income Tax Return, youmust file that form for the decedent's final taxyear. See the instructions for Form 1040NRfor the filing requirements, due date, andwhere to file.

Joint ReturnGenerally, the personal representative andthe surviving spouse can file a joint return forthe decedent and the surviving spouse.However, the surviving spouse alone can file

the joint return if no personal representativehas been appointed before the due date forfiling the final joint return for the year of death.This also applies to the return for the pre-ceding year if the decedent died after theclose of the preceding tax year and before thedue date for filing that return. The income ofthe decedent that was includible on his or herreturn for the year up to the date of death (seeIncome To Include, later) and the income ofthe surviving spouse for the entire year mustbe included in the final joint return.

A final joint return with the deceasedspouse cannot be filed if the surviving spouseremarried before the end of the year of thedecedent's death. The filing status of the de-ceased spouse in this instance is marriedfiling separate return.

For information about tax benefits a sur-viving spouse may be entitled to, see TaxBenefits for Survivors, later under Other TaxInformation.

Personal representative may revoke jointreturn election. A court-appointed personalrepresentative may revoke an election to filea joint return that was previously made by thesurviving spouse alone. This is done by filinga separate return for the decedent within oneyear from the due date of the return (including

any extensions). The joint return made by thesurviving spouse will then be regarded as theseparate return of that spouse by excludingthe decedent's items and refiguring the taxliability.

Income To IncludeThe decedent's income includible on the finalreturn is generally determined as if the personwere still alive except that the taxable periodis usually shorter because it ends on the dateof death. The method of accounting regularlyused by the decedent before death also de-termines the income includible on the finalreturn. This section explains how some typesof income are reported on the final return.

For more information about accountingmethods, get Publication 538, AccountingPeriods and Methods.

Under the Cash MethodIf the decedent accounted for income underthe cash method, only those items actuallyor constructively received before death areaccounted for in the final return.

Constructive receipt of income. Interestfrom coupons on the decedent's bonds wasconstructively received by the decedent if thecoupons matured in the decedent's final taxyear, but had not been cashed. Include theinterest in the final return.

Generally, a dividend was constructivelyreceived if it was available for use by the de-cedent without restriction. If the corporationcustomarily mailed its dividend checks, thedividend was includible when received. If theindividual died between the time the dividendwas declared and the time it was received inthe mail, the decedent did not constructivelyreceive it before death. Do not include thedividend in the final return.

Under an Accrual MethodGenerally, under an accrual method of ac-counting, income is reported when earned.

If the decedent used an accrual method,only the income items normally accrued be-

fore death are to be included in the final re-turn.

Partnership IncomeThe treatment of partnership income dependson when the partnership's tax year began.

Partnership tax year beginning before1998. The death of a partner generally doesnot close the partnership's tax year before itnormally ends. It continues for both the re-maining partners and the deceased partner.

Even if the partnership has only two partners,the death of one does not terminate the part-nership or close its tax year, provided thedeceased partner's estate or successor con-tinues to share in the partnership's profits orlosses. If the surviving partner terminates thepartnership by discontinuing its business op-erations, the partnership tax year closes asof the date of termination. If the deceasedpartner's estate or successor sells, ex-changes, or liquidates its entire interest in thepartnership, the partnership's tax year for theestate or successor will close as of the dateof the sale or exchange or the date the liqui-dation is completed.

On the decedent's final return include thedecedent's distributive share of partnership

items for the partnership's tax year endingwithin or with the decedent's last tax year (theyear ending on the date of death).

Do not include on the final return the dis-tributive share of partnership income for apartnership's tax year ending after the dece-dent's death. In this case, partnership incomeearned up to and including the date of deathis income in respect of the decedent, dis-cussed later. Income earned after the dateof death to the end of the partnership's taxyear is income to the estate or successor ininterest.

Example. Harry Rose was a partner inABC partnership and reported his income ona tax year ending December 31. The part-nership uses a tax year ending November 31.Harry died March 31, 1998, and his estateestablished a tax year ending March 31.

The distributive share of taxable incomefrom the partnership based on the decedent'sinterest is reported as follows.

1) Final Return for the Decedent - January1 through March 31, 1998, does not in-clude any income from the ABC part-nership.

2) Income Tax Return of the Estate - April1, 1998, through March 31, 1999, in-cludes income from the ABC partnershipyear ending November 31, 1998. Theportion of the income from the partner-ship for the period December 1, 1997,through March 31, 1998, is income inrespect of the decedent.

Partnership tax year beginning after 1997.The death of a partner closes the partner-ship's tax year for that partner. Generally, itdoes not close the partnership's tax year forthe remaining partners. The decedent's dis-tributive share of partnership items must befigured as if the partnership's tax year endedon the date the partner died. To avoid an in-terim closing of the partnership books, thepartners can agree to estimate the decedent'sdistributive share by prorating the amountsthe partner would have included for the entirepartnership tax year.

On the decedent's final return include:

Page 4


5/40

The decedent's distributive share of part-nership items for the partnership tax yearending within or with the decedent's lasttax year (the year ending on the date ofdeath), and

The decedent's distributive share of part-nership items for the partnership tax yearending on the date of death.

Income earned after the date of death to theend of the partnership's tax year is income tothe decedent's estate or successor in interest.

Example. Mary Smith was a partner inXYZ partnership and reported her income ona tax year ending December 31. The part-nership uses a tax year ending June 30. Marydied August 31, 1998, and her estate estab-lished its tax year ending August 31.

The distributive share of taxable incomefrom the partnership based on the decedent'spartnership interest is reported as follows:

1) Final Return for the Decedent - January1 through August 31, 1998, includesXYZ partnership items from (a) the part-nership tax year ending June 30, 1998,and (b) the partnership tax year begin-ning July 1, 1998, and ending August 31,1998 (the date of death).

2) Income Tax Return of the Estate - Sep-tember 1, 1998, through August 31,1999, includes XYZ partnership items forthe period September 1, 1998, throughJune 30, 1999. (There is no income inrespect of a decedent.)

S Corporation Income

If the decedent was a shareholder in an Scorporation, you must include on the final re-turn the decedent's share of S corporationincome for the corporation's tax year thatends within or with the decedent's last taxyear (year ending on the date of death). The

final return must also include the decedent'spro rata share of the S corporation's incomefor the period between the end of the corpo-ration's last tax year and the date of death.

The income for the part of the S corpo-ration's tax year after the shareholder's deathis income to the estate or other person whohas acquired the stock in the S corporation.

Self-Employment Income

Include self-employment income actually orconstructively received or accrued, dependingon the decedent's accounting method. Forself-employment tax purposes only, the de-cedent's self-employment income will includethe decedent's distributive share of a part-

nership's income or loss through the end ofthe month in which death occurred. For thispurpose, the partnership's income or loss isconsidered to be earned ratably over thepartnership's tax year.

Community Income

If the decedent was married and wasdomiciled in a community property state, halfof the income received and half of the ex-penses paid during the decedent's tax yearby either the decedent or spouse may beconsidered to be the income and expensesof the other. For more information, get Publi-cation 555, Community Property.

Interest and Dividend Income(Forms 1099)

A Form 1099 should be received for the de-cedent reporting interest and dividends thatwere includible on his or her return beforedeath. A separate Form 1099 should be re-ceived showing the interest and dividendsincludible on the returns of the estate or otherrecipient after the date of death and payableto the estate or other recipient. You can re-quest corrected Forms 1099, if these formsdo not properly reflect the right recipient oramounts.

The amount reported on Form 1099INTor Form 1099DIV, Dividends and Distribu-tions, may not necessarily be the correctamount that should be properly reported oneach income tax return. For example, a Form1099INT reporting interest payable to a de-cedent may include income that should bereported on the final income tax return of thedecedent, as well as income that the estateor other recipient should report, either as in-come earned after death or as income in re-spect of the decedent (discussed later). Forincome earned after death, you should askthe payer for a Form 1099 that properlyidentifies the recipient (by name and identifi-cation number) and the proper amount. If that

is not possible, or if the form includes anamount that represents income in respect ofthe decedent, include an explanation, suchas that shown next, under How to report, de-scribing the amounts that are properly re-ported on the decedent's final return.

How to report. If you are preparing the de-cedent's final return and you have receiveda Form 1099INT or a Form 1099DIV for thedecedent that includes amounts belonging tothe decedent and to another recipient (thedecedent's estate or another beneficiary), re-port the total interest shown on Form1099INT on Schedule 1 (Form 1040A) or onSchedule B (Form 1040). Next, enter a sub-

total of the interest shown on Forms 1099,and the interest reportable from other sourcesfor which you did not receive Forms 1099.Show any interest (including any interest youreceive as a nominee) belonging to anotherrecipient separately and subtract it from thesubtotal. Identify the amount of this adjust-ment as Nominee Distribution or other ap-propriate designation. Report dividend in-come on the appropriate schedule using thesame procedure.

Note. If the decedent received amountsas a nominee, you must give the actual ownera Form 1099, unless the owner is the dece-dent's spouse.

Medical Savings Account

The treatment of a medical savings account(MSA) at the death of the account holder de-pends on who acquires the interest in theaccount. If the estate of the holder acquiresthe interest, the fair market value of the as-sets in the account on the date of death isincluded in gross income on the decedent'sfinal return. The estate tax deduction, dis-cussed later, does not apply to this amount.

If a beneficiary acquires the interest, seethe discussion under Income in Respect ofthe Decedent, later. For other information onMSAs, see Publication 969.

Education IRA

Beginning in 1998, an education individualretirement account (education IRA) can beestablished for the benefit of certain individ-uals. For more information on education IRAs,see Publication 590.

Generally, the balance in the accountmust be distributed within 30 days after theindividual for whom the account was estab-lished reaches age 30, or dies, whichever isearlier. The treatment of the education IRAat the death of an individual under age 30

depends on who acquires the interest in theaccount. If the decedent's estate acquires theinterest, the earning on the account must beincluded on the final income tax return of thedecedent. The estate tax deduction, dis-cussed later, does not apply to this amount.If a beneficiary acquires the interest, see thediscussion under Income in Respect of theDecedent, later.

Roth IRA

Beginning in 1998, an individual may be ableto establish and contribute to a new individualretirement plan called a Roth IRA. For infor-mation on these plans, see Publication 590.

If the Roth IRA owner withdrew an amountfrom a traditional IRA in 1998 and convertedit to the Roth IRA, any amount the ownermust include in income as a result of thewithdrawal is generally included ratably overthe 4-year period beginning with 1998. If theowner dies during that 4-year period, anyamount not previously reported must be in-cluded on the decedent's final return. How-ever, if the owner's surviving spouse receivesthe entire interest in all the owner's RothIRAs, that spouse can choose to continue toinclude the amounts in income ratably overthe remaining years in the 4-year period.

Accelerated Death Benefits

Accelerated death benefits are amounts re-ceived under a life insurance contract beforethe death of the insured individual. Thesebenefits also include amounts received on thesale or assignment of the contract to a viaticalsettlement provider. This exclusion appliesonly if the insured was a terminally or chron-ically ill individual.

Generally, if the decedent received accel-erated death benefits either on his or her ownlife or on the life of another person, thosebenefits are not included in the decedent'sincome. For more information, see the dis-cussion under Gifts, Insurance, and Inher-itancesunder Other Tax Information, later.

Exemptionsand DeductionsGenerally, the rules for exemptions and de-ductions allowed to an individual also applyto the decedent's final income tax return.Show on the final return deductible items thedecedent paid before death (or accrued, if thedecedent reported deductions on an accrualmethod). This section contains a detaileddiscussion of medical expenses because,under certain conditions, the tax treatmentcan be different for the medical expenses ofthe decedent. See Medical Expenses, below.

Page 5


6/40

ExemptionsYou can claim the personal exemption in fullon a final income tax return. If the decedentwas another person's dependent (i.e., a par-ent's), you cannot claim the personal ex-emption on the decedent's final return.

Standard DeductionIf you do not itemize deductions on the finalreturn, the full amount of the appropriatestandard deduction is allowed regardless of

the date of death. For information on the ap-propriate standard deduction, get Publication501.

Medical ExpensesMedical expenses paid before death by thedecedent are deductible on the final incometax return if deductions are itemized. Thisincludes expenses for the decedent as wellas for the decedent's spouse and depen-dents.

CAUTION

!Qualified medical expenses paid be-fore death by the decedent are notdeductible if paid with a tax-free dis-

tribution from a medical savings account.

Election for decedent's expenses. Medicalexpenses that were not paid before death areliabilities of the estate and are shown on thefederal estate tax return (Form 706). How-ever, if medical expenses for the decedentare paid out of the estate during the 1-yearperiod beginning with the day after death, youcan elect to treat all or part of the expensesas paid by the decedent at the time they wereincurred.

If you make the election, you can claimall or part of the expenses on the decedent'sincome tax return rather than on the federalestate tax return (Form 706). You can deductexpenses incurred in the year of death on thefinal income tax return. You should file an

amended return (Form 1040X) for medicalexpenses incurred in an earlier year, unlessthe statutory period for filing a claim for thatyear has expired.

The amount you can deduct on the in-come tax return is the amount above 7.5%of adjusted gross income. The amounts notdeductible because of this percentage cannotbe claimed on the federal estate tax return.

Making the election. You make theelection by filing with the decedent's incometax return, or amended return, a statement induplicate that you have not claimed theamount as an estate tax deduction, and thatthe estate waives the right to claim theamount as a deduction. This election appliesonly to expenses incurred for the decedent,not to expenses incurred to provide medicalcare for dependents.

Example. Richard Brown used the cashmethod of accounting and filed his income taxreturn on a calendar year basis. Mr. Browndied on June 1, 1998, after incurring $800 inmedical expenses. Of that amount, $500 wasincurred in 1997 and $300 was incurred in1998. Richard filed his 1997 income tax returnbefore April 15, 1998. The personal repre-sentative of the estate paid the entire $800liability in August 1998.

The personal representative may then filean amended return (Form 1040X) for 1997claiming the $500 medical expense as a de-duction, subject to the 7.5% limit. The $300

of expenses incurred in 1998 can be de-ducted on the final income tax return, subjectto the 7.5% limit. The personal representativemust file a statement in duplicate with eachreturn stating that these amounts have notbeen claimed on the federal estate tax return(Form 706), and waiving the right to claimsuch a deduction on Form 706 in the future.

Medical expenses not paid by estate. Ifyou paid medical expenses for your deceasedspouse or dependent, claim the expenses on

your tax return for the year in which you paidthem, whether they are paid before or afterthe decedent's death. If the decedent was achild of divorced or separated parents, themedical expenses can usually be claimed byboth the custodial and noncustodial parent tothe extent paid by that parent during the year.

Insurance reimbursements. Insurance re-imbursements of previously deducted medicalexpenses due a decedent at the time of deathand later received by the decedent's estateare includible in the income tax return of theestate (Form 1041) for the year the re-imbursements are received. The reimburse-ments are also includible in the decedent'sgross estate.

Deduction for LossesA decedent's net operating loss deductionfrom a prior year and any capital losses(capital losses include capital loss carryovers)can be deducted only on the decedent's finalincome tax return. A net operating loss on thedecedent's final income tax return can becarried back to prior years. You cannot de-duct any unused net operating loss or capitalloss on the estate's income tax return.

At-risk loss limits. Special at-risk rules ap-ply to most activities that are engaged in asa trade or business or for the production ofincome.

These rules limit the amount of deductibleloss to the amount for which the individualwas considered at risk in the activity. An in-dividual generally will be considered at risk tothe extent of the cash and the adjusted basisof property that he or she contributed to theactivity and any amounts the individual bor-rowed for use in the activity. However, an in-dividual will be considered at risk for amountsborrowed only if he or she was personally li-able for the repayment or if the amounts bor-rowed were secured by property other thanthat used in the activity. The individual is notconsidered at risk for borrowed amounts if thelender has an interest in the activity or if thelender is related to a person who has an in-terest in the activity. For more information, get

Publication 925, Passive Activity and At-RiskRules.

Passive activity rules. A passive activity isany trade or business activity in which thetaxpayer does not materially participate. Todetermine material participation, get Publica-tion 925. Rental activities are also passiveactivities regardless of the taxpayer's partic-ipation, unless the taxpayer meets certain el-igibility requirements.

Individuals, estates, and trusts can offsetpassive activity losses only against passiveactivity income. Passive activity losses orcredits that are not allowed in one tax yearcan be carried forward to the next year.

In general, if a passive activity interest istransferred because of the death of a tax-payer, the accumulated unused passive ac-tivity losses are allowed as a deductionagainst the decedent's income in the year ofdeath. Losses are allowed only to the extentthey are greater than the excess of thetransferee's (recipient of the interest trans-ferred) basis in the property over the dece-dent's adjusted basis in the property imme-diately before death. The portion of the lossesthat is equal to the excess is not allowed asa deduction for any tax year.

Use Form 8582, Passive Activity LossLimitations, to summarize losses and incomefrom passive activities and to figure theamounts allowed. For more information, getPublication 925.

Credits, Other Taxes,and PaymentsThis section includes brief discussions ofsome of the tax credits, types of taxes thatmay be owed, income tax withheld, and esti-mated tax payments that are reported on thefinal return of a decedent.

CreditsYou can claim on the final income tax returnany tax credits that applied to the decedentbefore death. Some of these credits are dis-cussed next.

Earned income credit. If the decedent wasan eligible individual, you can claim theearned income credit on the decedent's finalreturn even though the return covers lessthan 12 months. If the allowable credit is morethan the tax liability for the year, the excessis refunded.

For more information, get Publication 596,Earned Income Credit.

Credit for the elderly or the disabled. Thiscredit is allowable on a decedent's final in-come tax return if the decedent was age 65or older or had retired before the end of thetax year on permanent and total disability.

For more information, get Publication 524,Credit for the Elderly or the Disabled.

Child tax credit. If the decedent had a qual-ifying child, you may be able to claim the childtax credit on the decedent's final return eventhough the return covers less than 12 months.If the decedent had three or more qualifyingchildren, you may be able to claim the addi-tional child tax credit and get a refund if thecredit is more than the tax liability. For moreinformation, see your form instructions.

General business tax credit. The generalbusiness credit available to a taxpayer is lim-ited. Any unused credit arising in a tax yearbeginning before 1998 generally is carriedback 3 years and then carried forward for upto 15 years. Any unused credit arising in a taxyear beginning after 1997 has a 1-yearcarryback and a 20-year carryforward period.

After the carryforward period, a deductionmay be allowed for any unused businesscredit. If the taxpayer dies before the end ofthe carryforward period, the deduction gen-erally is allowed in the year of death.

For more information, get Publication 334,Tax Guide for Small Business.

Page 6


7/40

Other TaxesTaxes other than income tax that may beowed on the final return of a decedent includeself-employment tax and alternative minimumtax, which are reported in the Other Taxessection of Form 1040.

Self-employment tax. If the decedent hadnet earnings from self-employment of $400or more in the year of death, self-employmenttax may be owed on the final return.

Alternative minimum tax (AMT). The taxlaws give special treatment to some kinds ofincome and allow special deductions andcredits for some kinds of expenses. So thattaxpayers who benefit from these laws willpay at least a minimum amount of tax, aspecial tax has been enactedthe alterna-tive minimum tax (AMT). In general, the AMTis the excess of the tentative minimum taxover the regular tax shown on the return.

Form 6251. Use Form 6251, AlternativeMinimum TaxIndividuals, to determine ifthis tax applies to the decedent. See the forminstructions for information on when you mustattach the form to the tax return.

Payments of TaxThe income tax withheld from the decedent'ssalary, wages, pensions, or annuities, and theamount paid as estimated tax, for example,are credits (advance payments of tax) thatyou must claim on the final return.

Name, Address,and SignatureThe word DECEASED, the decedent'sname, and the date of death should be writtenacross the top of the tax return. In the nameand address space you should write the nameand address of the decedent and the surviv-ing spouse. If a joint return is not being filed,the decedent's name should be written in the

name space and the personal represen-tative's name and address should be writtenin the remaining space.

Signature. If a personal representative hasbeen appointed, that person must sign thereturn. If it is a joint return, the survivingspouse must also sign it. If no personal rep-resentative has been appointed, the survivingspouse (on a joint return) should sign the re-turn and write in the signature area Filing assurviving spouse. If no personal represen-tative has been appointed and if there is nosurviving spouse, the person in charge of thedecedent's property must file and sign thereturn as personal representative.

When and Where To FileThe final individual income tax return is dueat the same time the decedent's return wouldhave been due had death not occurred. Afinal return for a decedent who was a calen-dar year taxpayer is generally due on April15 following the year of death, regardless ofwhen during the year death occurred. How-ever, when the due date falls on a Saturday,Sunday, or legal holiday, you can file on thenext business day.

The tax return must be prepared on a formfor the year of death regardless of when dur-ing the year death occurred.

File the final income tax return of the de-cedent with the Internal Revenue Service

center for the place where you live. You alsomay handcarry the return to any office of thedistrict director within your district.

Tax Forgiveness forDeaths Due toMilitary or TerroristicActionsIf the decedent was a member of the ArmedForces or a civilian employee of the United

States, the decedent's income tax liabilitymay be forgiven if his or her death was dueto service in a combat zone or to military orterroristic actions.

Combat ZoneIf a member of the Armed Forces of theUnited States dies while in active service ina combat zone or from wounds, disease, orinjury incurred in a combat zone, the dece-dent's income tax liability is abated (forgiven)for the entire year in which death occurredand for any prior tax year ending on or afterthe first day the person served in a combatzone in active service. For this purpose, aqualified hazardous duty area is treated as a

combat zone.If the tax (including interest, additions tothe tax, and additional amounts) for theseyears has been assessed, the assessmentwill be forgiven. If the tax has been collected(regardless of the date of collection), that taxwill be credited or refunded.

Any of the decedent's income tax for taxyears before those mentioned above that re-mains unpaid as of the actual (orpresumptive) date of death will not be as-sessed. If any unpaid tax (including interest,additions to the tax, and additional amounts)has been assessed, this assessment will beforgiven. Also, if any tax was collected afterthe date of death, that amount will be creditedor refunded.

The date of death of a member of theArmed Forces reported as missing in actionor as a prisoner of war is the date his or hername is removed from missing status formilitary pay purposes. This is true even ifdeath actually occurred earlier.

Military or Terroristic ActionsThe decedent's income tax liability is forgivenif, at death, he or she was a military or civilianemployee of the United States who died be-cause of wounds or injury incurred:

1) While a U.S. employee, and

2) In a military or terroristic action outsidethe United States.

The forgiveness applies to the tax year inwhich death occurred and for any prior taxyear in the period beginning with the yearbefore the year in which the wounds or injuryoccurred.

Example. The income tax liability of acivilian employee of the United States whodied in 1998 because of wounds incurredwhile a U.S. employee outside the UnitedStates in a terroristic attack that occurred in1987 will be forgiven for 1998 and for all priortax years in the period 19861997. Refundsare allowed for the tax years for which theperiod for filing a claim for refund has notended, as discussed later.

Military or terroristic action defined. Mili-tary or terroristic action means:

1) Any terroristic activity that most of theevidence indicates was directed againstthe United States or any of its allies, and

2) Any military action involving the U.S.Armed Forces and resulting from vi-olence or aggression against the UnitedStates or any of its allies, or the threatof such violence or aggression.

Military action does not include trainingexercises. Any multinational force in whichthe United States is participating is treatedas an ally of the United States.

Claim for Credit or RefundIf any of these tax-forgiveness situations ap-plies to a prior year tax, any tax paid for whichthe period for filing a claim has not ended willbe credited or refunded; if any tax is still due,it will be canceled. The normal period for filinga claim for credit or refund is 3 years after thereturn was filed or 2 years after the tax waspaid, whichever is later.

If death occurred in a combat zone or fromwounds, disease, or injury incurred in a com-bat zone, the period for filing the claim is ex-

tended by:1) The amount of time served in the combat

zone (including any period in which theindividual was in missing status); plus

2) The period of continuous qualifiedhospitalization for injury from service inthe combat zone, if any; plus

3) The next 180 days.

Qualified hospitalization means anyhospitalization outside the United States, andany hospitalization in the United States of notmore than 5 years.

Filing a claim. Use the following proceduresto file a claim.

1) If a U.S. individual income tax return(Form 1040, 1040A, or 1040EZ) has notbeen filed, you should make a claim forrefund of any withheld income tax orestimated tax payments by filing Form1040. Form W2, Wage and Tax State-ment, must accompany all returns.

2) If a U.S. individual income tax return hasbeen filed, you should make a claim forrefund by filing Form 1040X. You mustfile a separate Form 1040X for each yearin question.

You must file these returns and claimswith the Internal Revenue Service Center,P.O. Box 267, Covington, KY 41019, Attn:Stop 28.

Identify all returns and claims for refundby writing Desert Storm KIA or FormerYugoslavia KIA in bold letters on the topof page 1 of the return or claim. On Forms1040 and 1040X, the phrase Desert Storm

KIA or Former Yugoslavia KIA mustbe written on the line for total tax. If the in-dividual was killed in a terroristic or militaryaction outside the United States, put KITAon the front of the return and on the line fortotal tax.

An attachment should include a computa-tion of the decedent's tax liability and a com-putation of the amount that is to be forgiven.On joint returns, you must make an allocationof the tax as described later under Joint re-

Page 7


8/40

turns. If you cannot make a proper allocation,you should attach a statement of all incomeand deductions allocable to each spouse andthe IRS will make the proper allocation.

The following necessary documentsmust accompany all returns and claims forrefund under these procedures:

1) Form 1310, Statement of Person Claim-ing Refund Due a Deceased Taxpayer.

2) A certification from the Department ofDefense or the Department of State that

the death was due to military orterroristic action outside the UnitedStates. For military employees and civil-ian employees of the Department of De-fense, certification must be made by thatdepartment on Form DOD 1300. For ci-vilian employees of all other agencies,certification must be a letter signed bythe Director General of the Foreign Ser-vice, Department of State, or his/herdelegate. The certification must includethe individual's name and social securitynumber, the date of injury, the date ofdeath, and a statement that the individ-ual died as the result of a military orterroristic action outside the UnitedStates and was an employee of the

United States at the date of injury andat the date of death.

If the certification has been received, butyou do not have enough tax information to filea timely claim for refund, you can suspend theperiod for filing a claim by filing Form 1040X,attaching Form 1310 and a statement that anamended claim will be filed as soon as youhave the required tax information.

Joint returns. If a joint return was filed,only the decedent's part of the income tax li-ability is eligible for the refund. Determine thedecedent's tax liability as follows:

1) Figure the income tax for which the de-cedent would have been liable if a sep-arate return had been filed.

2) Figure the income tax for which thespouse would have been liable if a sep-arate return had been filed.

3) Multiply the joint tax liability by a fraction.The numerator (top number) of the frac-tion is the amount in (1), above. Thedenominator (bottom number) of thefraction is the total of (1) and (2).

The amount in (3) above is the decedent'stax liability that is eligible for the refund.

Filing RemindersTo minimize the time needed to process thedecedent's final return and issue any refund,be sure to follow these procedures:

1) Write DECEASED, the decedent'sname, and the date of death across thetop of the tax return.

2) If a personal representative has beenappointed, the personal representativemust sign the return. If it is a joint return,the surviving spouse must also sign it.

3) If you are the decedent's spouse filing ajoint return with the decedent and nopersonal representative has been ap-pointed, write Filing as survivingspouse in the area where you sign thereturn.

4) If no personal representative has beenappointed and if there is no survivingspouse, the person in charge of the de-cedent's property must file and sign thereturn as personal representative.

5) To claim a refund for the decedent:

a) If you are the decedent's spousefiling a joint return with the dece-dent, file only the tax return to claimthe refund.

b) If you are the personal represen-

tative and the return is not a jointreturn filed with the decedent's sur-viving spouse, file the return andattach a copy of the certificate thatshows your appointment by thecourt. (A power of attorney or acopy of the decedent's will is notacceptable evidence of your ap-pointment as the personal repre-sentative.) If you are filing anamended return, attach Form 1310and a copy of the certificate of ap-pointment (or, if you have alreadysent the certificate of appointmentto IRS, write Certificate PreviouslyFiled at the bottom of Form 1310).

c) If you are not filing a joint return asthe surviving spouse and a personalrepresentative has not been ap-pointed, file the return and attachForm 1310 and proof of death(generally, a copy of the death cer-tificate).

Other Tax InformationThis section contains information about theeffect of an individual's death on the incometax liability of the survivors (including widowsand widowers), the beneficiaries, and the es-tate.

Tax Benefits for Survivors

Survivors can qualify for certain benefits whenfiling their own income tax returns.

Joint return by surviving spouse. A sur-viving spouse can file a joint return for theyear of death and may qualify for special taxrates for the following 2 years, as explainedunder Qualifying widows and widowers, be-low.

Decedent as your dependent. If the dece-dent qualified as your dependent for the partof the year before death, you can claim thefull exemption amount for the dependent onyour tax return, regardless of when deathoccurred during the year.

If the decedent was your qualifying child,you may be able to claim the child tax credit.

Qualifying widows and widowers. If yourspouse died within the 2 tax years precedingthe year for which your return is being filed,you may be eligible to claim the filing statusof qualifying widow(er) with dependent childand qualify to use the Married filing jointlytaxrates.

Requirements. Generally, you qualify forthis special benefit if you meet all of the fol-lowing requirements:

1) You were entitled to file a joint return withyour spouse for the year of death whether or not you actually filed jointly;

2) You did not remarry before the end ofthe current tax year;

3) You have a child, stepchild, or fosterchild who qualifies as your dependent forthe tax year; and

4) You provide more than half the cost ofmaintaining your home, which is theprincipal residence of that child for the

entire year except for temporary ab-sences.

Example. William Burns's wife died in1996. Mr. Burns has not remarried and cont-inued throughout 1997 and 1998 to maintaina home for himself and his dependent child.For 1996 he was entitled to file a joint returnfor himself and his deceased wife. For 1997and 1998, he qualifies to file as a Qualifyingwidow(er) with dependent child. For lateryears, he may qualify to file as a head ofhousehold.

Figuring your tax. Include only your ownincome, exemptions, and deductions in figur-ing your tax, but check the box on line 5(Form 1040 or 1040A) under filing status on

your tax return and enter the year of death inthe parentheses. Use the Tax Rate Scheduleor the column in the Tax Table for Marriedfiling jointly, which gives you the split-incomebenefits.

The last year you can file jointly with, orclaim an exemption for, your deceasedspouse is the year of death.

Joint return filing rules. If you are the sur-viving spouse and a personal representativeis handling the estate for the decedent, youshould coordinate filing your return for theyear of death with this personal represen-tative. See Joint Return earlier under FinalReturn for Decedent.

Income in Respectof the DecedentAll gross income that the decedent wouldhave received had death not occurred, thatwas not properly includible on the final return,discussed earlier, is income in respect of thedecedent.

How To ReportIncome in respect of a decedent must be in-cluded in the gross income of:

1) The decedent's estate, if the estate re-ceives it, or

2) The beneficiary, if the right to income is

passed directly to the beneficiary and thebeneficiary receives it, or

3) Any person to whom the estate properlydistributes the right to receive it.

Example 1. Frank Johnson owned andoperated an apple orchard. He used the cashmethod of accounting. He sold and delivered1,000 bushels of apples to a canning factoryfor $2,000, but did not receive payment be-fore his death. When the estate was settled,payment had not been made and the estatetransferred the right to the payment to hiswidow. When Frank's widow collects the$2,000, she must include that amount in herreturn. It is not to be reported on the final re-

Page 8


9/40

turn of the decedent nor on the return of theestate.

Example 2. Assume Frank Johnson usedthe accrual method of accounting in Example1. The amount accrued from the sale of theapples would be included on his final return.Neither the estate nor the widow will realizeincome in respect of the decedent when themoney is later paid.

Example 3. On February 1, George High,a cash method taxpayer, sold his tractor for

$3,000, payable March 1 of the same year.His adjusted basis in the tractor was $2,000.Mr. High died on February 15, before receiv-ing payment. The gain to be reported as in-come in respect of the decedent is the $1,000difference between the decedent's basis inthe property and the sale proceeds. In otherwords, the income in respect of the decedentis the gain the decedent would have realizedhad he lived.

Example 4. Cathy O'Neil was entitled toa large salary payment at the date of herdeath. The amount was to be paid in five an-nual installments. The estate, after collectingtwo installments, distributed the right to theremaining installments to you, the beneficiary.None of the payments would be included in

Cathy's final return. The estate must includein its gross income the two installments it re-ceived, and you must include in your grossincome each of the three installments as youreceive them.

Example 5. You inherited the right to re-ceive renewal commissions on life insurancesold by your father before his death. You in-herited the right from your mother, who ac-quired it by bequest from your father. Yourmother died before she received all the com-missions she had the right to receive, so youreceived the rest. None of these commissionswere included in your father's final return. Butthe commissions received by your motherwere included in her gross income. The

commissions you received are not includiblein your mother's gross income, even on herfinal return. You must include them in yourincome.

Character of income. The character of theincome you receive in respect of a decedentis the same as it would have been to the de-cedent if he or she were alive. If the incomewould have been a capital gain to the dece-dent, it will be a capital gain to you.

Transfer of right to income. If you transferyour right to income in respect of a decedent,you must include in your income the greaterof:

1) The amount you receive for the right, or

2) The fair market value of the right youtransfer.

If you make a gift of such a right, you mustinclude in your gross income the fair marketvalue of the right at the time of the gift.

If the right to income from an installmentobligation is transferred, the amount you mustinclude in income is reduced by the basis ofthe obligation. See Installment obligations,below.

Transfer defined. A transfer for this pur-pose includes a sale, exchange, or other dis-position, the satisfaction of an installmentobligation at other than face value, or thecancellation of an installment obligation.

Installment obligations. If the decedent hadsold property using the installment methodand you collect payments on an installmentobligation you acquired from the decedent,use the same gross profit percentage thedecedent used to figure the part of eachpayment that represents profit. Include in yourincome the same profit the decedent wouldhave included had death not occurred. Formore information, get Publication 537, In-stallment Sales.

If you dispose of an installment obligationacquired from a decedent (other than bytransfer to the obligor), the rules explained inPublication 537 for figuring gain or loss on thedisposition apply to you.

Transfer to obligor. A transfer of a rightto income, discussed earlier, has occurred ifthe decedent (seller) had sold property usingthe installment method and the installmentobligation is transferred to the obligor (buyeror person legally obligated to pay the install-ments). A transfer also occurs if the obligationis canceled either at death or by the estateor person receiving the obligation from thedecedent. An obligation that becomes unen-forceable is treated as having been canceled.

If such a transfer occurs, the amount in-cluded in the income of the transferor (theestate or beneficiary) is the greater of the

amount received or the fair market value ofthe installment obligation at the time oftransfer, reduced by the basis of the obli-gation. The basis of the obligation is the de-cedent's basis, adjusted for all installmentpayments received after the decedent's deathand before the transfer.

If the decedent and obligor were relatedpersons, the fair market value of the obli-gation cannot be less than its face value.

Specific Types of Incomein Respect of a DecedentThis section explains and provides examplesof some specific types of income in respectof a decedent.

Wages. The entire amount of wages or otheremployee compensation earned by the de-cedent but unpaid at the time of death is in-come in respect of the decedent. The incomeis not reduced by any amounts withheld bythe employer when paid to the estate or otherbeneficiary. If the income is $600 or more, theemployer should report it in box 3 of Form1099MISC and give the recipient a copy ofthe form or a similar statement.

Wages paid as income in respect of adecedent are not subject to federal incometax withholding. However, if paid during thecalendar year of death, they are subject towithholding for social security and Medicaretaxes. These taxes should be included on the

decedent's Form W2 with the taxes withheldbefore death. Wages paid as income in re-spect of a decedent after the year of deathgenerally are not subject to withholding forany federal taxes.

Farm income from crops, crop shares, andlivestock. A farmer's growing crops andlivestock at the date of death would notnormally give rise to income in respect of adecedent or income to be included in the finalreturn. However, when a cash method farmerreceives rent in the form of crop shares orlivestock and owns the crop shares or live-stock at the time of death, the rent is incomein respect of a decedent and is reported in the

year in which the crop shares or livestock aresold or otherwise disposed of. The sametreatment applies to crop shares or livestockthe decedent had a right to receive as rentat the time of death for economic activitiesthat occurred before death.

If the individual died during a rent period,only the proceeds from the portion of the rentperiod ending with death are income in re-spect of a decedent. The proceeds from theportion of the rent period from the day afterdeath to the end of the rent period are incometo the estate. Cash rent or crop shares andlivestock received as rent and reduced tocash by the decedent are includible in thefinal return even though the rent period didnot end until after death.

Example. Alonzo Roberts, who used thecash method of accounting, leased part of hisfarm for a 1-year period beginning March 1.The rental was one-third of the crop, payablein cash when the crop share is sold at thedirection of Roberts. Roberts died on June30 and was alive during 122 days of the rentalperiod. Seven months later, Roberts' personalrepresentative ordered the crop to be soldand was paid $1,500. Of the $1,500, 122/365,or $501, is income in respect of a decedent.The balance of the $1,500 received by the

estate, $999, is income to the estate.

Partnership income. Any part of a distribu-tive share of partnership income of the estateor other successor in interest of a deceasedpartner that is for the period ending with thedate of the decedent's death is income in re-spect of a decedent if the partnership's taxyear began before 1998. (There is no incomein respect of a decedent for this income if thepartnership tax year began after 1997.) Anypartnership income for the period after thedecedent's death is income of the estate orother successor in interest. These rules applyto the partnership's tax year that ends afterthe date of the decedent's death. See Part-nership Income under Income To Include,

earlier in the section titled Final Return forDecedent.If the partner who died had been receiving

payments representing a distributive shareor guaranteed payment in liquidation of thepartner's interest in a partnership, the re-maining payments made to the estate or othersuccessor interest are income in respect ofthe decedent. The estate or the successorreceiving the payments will have to includethem in gross income when received. Simi-larly, the estate or other successor in interestreceives income in respect of a decedent ifamounts are paid by a third person in ex-change for the successor's right to the futurepayments.

For a complete discussion of partnershiprules, get Publication 541, Partnerships.

U.S. Savings Bonds acquired from dece-dent. If Series EE or Series I U.S. SavingsBonds that were owned by a cash methodindividual who had chosen to report the in-terest each year (or by an accrual methodindividual) are transferred because of death,the increase in value of the bonds (interestearned) in the year of death up to the dateof death must be reported on the decedent'sfinal return. The transferee (estate or benefi-ciary) reports on its return only the interestearned after the date of death.

The redemption values of U.S. SavingsBonds generally are available from localbanks or savings and loan institutions. You

Page 9


10/40

also can get such information from yournearest Federal Reserve Bank.

You also can get information by writing to:

Bureau of the Public DebtP.O. Box 1328Parkersburg, WV 261061328

Or, on the Internet, visit:www.publicdebt.treas.gov

If the bonds transferred because of deathwere owned by a cash method individual whohad not chosen to report the interest eachyear and had purchased the bonds entirelywith personal funds, interest earned beforedeath must be reported in one of the followingways:

1) The person (executor, administrator,etc.) who must file the final income taxreturn of the decedent can electto in-clude in it all of the interest earned on thebonds before the decedent's death. Thetransferee (estate or beneficiary) thenincludes in its return only the interestearned after the date of death; or

2) If the election in (1), above, was notmade, the interest earned to the date ofdeath is income in respect of the dece-dent and is not included in the dece-dent's final return. In this case, all of theinterest earned before and after the de-cedent's death is income to thetransferee (estate or beneficiary). Atransferee who uses the cash methodof accounting and who has not chosento report the interest annually may deferreporting any of it until the bonds arecashed or the date of maturity, which-ever is earlier. In the year the interest isreported, the transferee may claim adeduction for any federal estate tax paidthat arose because of the part of interest

(if any) included in the decedent's estate.

Example 1. Your uncle, a cash methodtaxpayer, died and left you a $1,000 SeriesEE Bond. He had bought the bond for $500and had not chosen to report the increase invalue each year. At the date of death, interestof $94 had accrued on the bond, and its valueof $594 at date of death was included in youruncle's estate. Your uncle's personal repre-sentative did not choose to include the $94accrued interest in the decedent's final in-come tax return. You are a cash method tax-payer and do not choose to report the in-crease in value each year as it is earned.Assuming you cash it when it reaches matu-rity value of $1,000, you would report $500

interest income (the difference between ma-turity value of $1,000 and the original cost of$500) in that year. You also are entitled toclaim, in that year, a deduction for any federalestate tax resulting from the inclusion in youruncle's estate of the $94 increase in value.

Example 2. If, in Example 1, the personalrepresentative had chosen to include the $94interest earned on the bond before death inthe final income tax return of your uncle, youwould report only $406 ($500 minus $94) asinterest when you cashed the bond at matu-rity. Since this $406 represents the interestearned after your uncle's death and was notincluded in his estate, no deduction for federalestate tax is allowable for this amount.

Example 3. Your uncle died owning Se-ries HH Bonds that he acquired in exchangefor Series EE Bonds. You were the benefi-ciary on these bonds. The decedent used thecash method of accounting and had not cho-sen to report the increase in redemption priceof the Series EE Bonds each year as it ac-crued. Your uncle's personal representativemade no election to include any interestearned before death in the decedent's finalreturn. Your income in respect of the dece-dent is the sum of the unreported increase invalue of the Series EE Bonds, which consti-tuted part of the amount paid for Series HHBonds, and the interest, if any, payable on theSeries HH Bonds but not received as of thedate of the decedent's death.

Specific dollar amount legacy satisfiedby transfer of bonds. If you receive SeriesEE or Series I Bonds from an estate in satis-faction of a specific dollar amount legacy andthe decedent was a cash method taxpayerwho did not elect to report interest each year,only the interest earned after you receive thebonds is your income. The interest earned tothe date of death plus any further interestearned to the date of distribution is income to(and reportable by) the estate.

Cashing U.S. Savings Bonds. When

you cash a U.S. Savings Bond that you ac-quired from a decedent, the bank or otherpayer that redeems it must give you a Form1099INT, Interest Income, if the interest partof the payment you receive is $10 or more.Your Form 1099INT should show the differ-ence between the amount received and thecost of the bond. The interest shown on yourForm 1099INT will not be reduced by anyinterest reported by the decedent beforedeath, or, if elected, by the personal repre-sentative on the final income tax return of thedecedent, or by the estate on the estate's in-come tax return. Your Form 1099INT mayshow more interest than you must include inyour income.

You must make an adjustment on your taxreturn to report the correct amount of interest.Get Publication 550, Investment Income andExpenses, for information about the correctreporting of this interest.

Interest accrued on U.S. Treasury bonds.The interest accrued on U.S. Treasury bondsowned by a cash method taxpayer andredeemable for the payment of federal estatetaxes that was not received as of the date ofthe individual's death is income in respect ofthe decedent. This interest is not included inthe decedent's final income tax return. Theestate will treat such interest as taxable in-come in the tax year received if it chooses toredeem the U.S. Treasury bonds to pay fed-eral estate taxes. If the person entitled to thebonds by bequest, devise, or inheritance, orbecause of the death of the individual (owner)receives them, that person will treat the ac-crued interest as taxable income in the yearthe interest is received. Interest that accrueson the U.S. Treasury bonds after the owner'sdeath does not represent income in respectof the decedent. The interest, however, istaxable income and must be included in thegross income of the respective recipients.

Interest accrued on savings certificates.The interest accrued on savings certificates(redeemable after death without forfeiture ofinterest) that is for the period from the dateof the last interest payment and ending withthe date of the decedent's death, but not re-

ceived as of that date, is income in respectof a decedent. Interest for a period after thedecedent's death that becomes payable onthe certificates after death is not income inrespect of a decedent, but is taxable incomeincludible in the gross income of the respec-tive recipients.

Inherited IRAs. If a beneficiary receives alump-sum distribution from a traditional IRAor a Roth IRA he or she inherited, all or someof it may be taxable. The distribution is taxa-ble in the year received as income in respectof a decedent up to the decedent's taxablebalance. This is the decedent's balance at thetime of death, including unrealized appreci-ation and income accrued to date of death,minus any nontaxable basis (nondeductiblecontributions). Amounts distributed that aremore than the decedent's entire IRA balance(includes taxable and nontaxable amounts)at the time of death are the income of thebeneficiary. See Roth IRA next for determin-ing taxability of Roth IRA distributions.

If the beneficiary of a traditional IRA is thedecedent's surviving spouse and that spouseproperly rolls over the distribution into anothertraditional IRA or to a Roth IRA, the distribu-tion is not currently taxed.

For the special rules on inherited IRAs,

see Publication 590.

Roth IRA. Beginning in 1998, an individualmay be able to establish and contribute to anew individual retirement plan called a RothIRA. For information on these plans, seePublication 590.

Qualified distributions from a Roth IRA arenot subject to tax. A distribution made to abeneficiary or to the Roth IRA owner's estateon or after the date of death is a qualifieddistribution if it is made after the5-taxable-year-period beginning with the firsttax year in which a contribution was made tothe owner's Roth IRA. If that first tax year is1998, a distribution is not a qualified distribu-tion unless it is made after 2002.

Generally, the entire interest in the RothIRA must be distributed by the end of the fifthcalendar year after the year of the owner'sdeath unless the interest is payable to adesignated beneficiary over his or her life orlife expectancy. If paid as an annuity, thedistributions must begin before the end of thecalendar year following the year of death. Ifthe sole beneficiary is the decedent's spouse,the spouse can delay the distributions untilthe decedent would have reached age 70 1/2or can treat the Roth IRA as his or her ownRoth IRA.

A portion of a distribution to a beneficiarythat is not a qualified distribution may beincludible in the beneficiary's gross income.Generally, the portion includible is theearnings in the decedent's Roth IRAs.Earnings attributable to the period ending withthe decedent's date of death are income inrespect of the decedent. Additional taxableamounts are the income of the beneficiary.

Education IRA. Beginning in 1998, an edu-cation individual retirement account (educa-tion IRA) can be established for the benefitof certain individuals. For more informationon education IRAs, see Publication 590.

Generally, the balance in the accountmust be distributed within 30 days after theindividual for whom the account was estab-lished reaches age 30 or dies, whichever isearlier. The treatment of the education IRAat the death of an individual under age 30

Page 10


11/40

depends on who acquires the interest in theaccount. If the decedent's estate acquires theinterest, see the discussion under Final Re-turn for Decedent, earlier.

If the decedent's spouse or other familymember is the designated beneficiary of thedecedent's account, the education IRA be-comes that person's education IRA. It is sub-

ject to the rules discussed in Publication 590.Any other beneficiary (including a spouse

or family member that is not the designatedbeneficiary) must include in gross income theearnings portion of the distribution. The dis-tribution must be made within 30 days. Anybalance remaining at the close of the 30-dayperiod is deemed to be distributed at thattime. The amount included in gross incomeis reduced by any qualified higher educationexpenses of the decedent that are paid by thebeneficiary within 1 year after the decedent'sdate of death. An estate tax deduction, dis-cussed later, applies to the amount includedin income by a beneficiary other than the de-cedent's spouse or family member.

Medical savings account (MSA). The treat-ment of an MSA at the death of the accountholder depends on who acquires the interestin the account. If the decedent's estate ac-quired the interest, see the discussion under

Final Return for Decedent, earlier.If the decedent's spouse is the designated

beneficiary of the MSA, the MSA becomesthat spouse's MSA. It is subject to the rulesdiscussed in Publication 969.

Any other beneficiary (including a spousethat is not the designated beneficiary) mustinclude in gross income the fair market valueof the assets in the account on the decedent'sdate of death. This amount must be reportedfor the beneficiary's tax year that includes thedecedent's date of death. The amount in-cluded in gross income is reduced by thequalified medical expenses for the decedentthat are paid by the beneficiary within 1 yearafter the decedent's date of death. An estatetax deduction, discussed later, applies to the

amount included in income by a beneficiary,other than the decedent's spouse.

Deductions in Respectof the DecedentItems such as business expenses, income-producing expenses, interest, and taxes, forwhich the decedent was liable but which arenot properly allowable as deductions on thedecedent's final income tax return, will be al-lowed when paid:

1) As a deduction to the estate; or

2) If the estate was not liable for them, asa deduction to the person who acquiredan interest in the decedent's property(subject to such obligations) because ofdeath.

Similar treatment is given to the foreigntax credit. A beneficiary who must pay a for-eign tax on income in respect of a decedentwill be entitled to claim the foreign tax credit.

Depletion. The deduction for percentagedepletion is allowable only to the person (es-tate or beneficiary) who has an economic in-terest in respect of the decedent to which thededuction relates, whether or not that personreceives the property from which the incomeis derived. An heir who (because of the de-cedent's death) receives income as a result

of the sale of units of mineral by the decedent(who used the cash method) will be entitledto the depletion allowance for that income. Ifthe decedent had not figured the deductionon the basis of percentage depletion, anydepletion deduction to which the decedentwas entitled at the time of death would beallowable on the decedent's final return, andno depletion deduction in respect of the de-cedent would be allowed anyone else.

For more information about depletion, getPublication 535, Business Expenses.

Estate Tax DeductionIncome that a decedent had a right to receiveis included in the decedent's gross estate andis subject to estate tax. This income in respectof a decedent is also taxed when received bythe recipient (estate or beneficiary). How-ever, an income tax deduction is allowed tothe recipient for the estate tax paid on theincome.

The deduction for estate tax can beclaimed only for the same tax year in whichthe income in respect of the decedent mustbe included in the recipient's gross income.(This also is true for income in respect of aprior decedent.)

Individuals can claim this deduction only

as an itemized deduction, provided they areotherwise eligible to itemize deductions. Thisdeduction is not subject to the 2% limit onmiscellaneous itemized deductions. Estatescan claim the deduction on the line providedfor the deduction on Form 1041. For the al-ternative minimum tax computation, the de-duction is not included in the itemized de-ductions that are an adjustment to taxableincome.

If the income in respect of the decedentis capital gain income, you must reduce thegain, but not below zero, by any deduction forestate tax paid on such gain. This applies infiguring:

The maximum tax on net capital gain,

The 50% exclusion for gain on smallbusiness stock, and

The limitation on capital losses.

Computation. To figure a recipient's estatetax deduction, determine

1) The estate tax that qualifies for the de-duction, and

2) The recipient's part of the deductible tax.

Deductible estate tax. The estate tax isthe tax on the taxable estate, reduced by anycredits allowed. The estate tax qualifying forthe deduction is the part for the net value ofall the items in the estate that represent in-come in respect of the decedent. Net value

is the excess of the items of income in respectof the decedent over the items of expensesin respect of the decedent. The deductibleestate tax is the difference between the actualestate tax and the estate tax determinedwithout including net value.

Example 1. Jack Sage used the cashmethod of accounting. At the time of hisdeath, he was entitled to receive $12,000from clients for his services and he had ac-crued bond interest of $8,000, for a total in-come in respect of the decedent of $20,000.He also owed $5,000 for business expensesfor which his estate is liable. The income andexpenses are reported on Jack's estate taxreturn.

The tax on Jack's estate is $9,460 aftercredits. The net value of the items includedas income in respect of the decedent is$15,000 ($20,000 minus $5,000). The estatetax determined without including the $15,000in the taxable estate is $4,840, after credits.The estate tax that qualifies for the deductionis $4,620 ($9,460 minus $4,840).

Recipient's deductible part. Figure therecipient's part of the deductible estate taxby dividing the estate tax value of the itemsof income in respect of the decedent included

in the recipient's gross income (the numera-tor)

Documents

US Internal Revenue Service: p559--1998