A 2022 survey found that 67% of Americans have no estate plan. Although COVID-19 increased individual awareness of the need to have a living will, will, or living trust, more than half of people don’t act on it.
Not having an estate plan can make things complicated when you die. What happens to tax debt when you die?
Keep reading to find out.
What Happens to Tax Debt When You Die?
What happens to tax debt when you die is a common question in the financial world. If a deceased person owes taxes after they pass, the IRS can pursue the estate until the full amount gets paid.
The Collection Statute Expiration Date (CSED) for collecting taxes is about 10 years. This means that the IRS can pursue owed taxes for 10 years. In some cases, they will extend the deadline.
The 10-year clock begins the day that the taxes are due. The limitation applies to tax liens and general collection activity.
If the deceased individual made income during the year prior to their death, the Administrator of the Estate, or a representative for the deceased person, has to file a deceased tax return.
The representative is responsible for accumulating financial details. They can also request previous tax transcripts through the IRS with Form 4506-T.
Form 1040 is commonly used to report the appropriate taxes. An income tax return might need to be filed for the estate if it generated over $600 before funds were distributed to the heirs.
Who Pays Taxes for a Deceased Person?
In the Estate Plan, the person who is responsible for paying the taxes of the deceased will be named. This person has to settle the estate and will receive the account information necessary to pay outstanding debts.
The named party is also in charge of figuring out refunds if there are any. The responsibility might fall into the hands of one of these individuals:
- The Administrator of the Estate
- Appointed Legal Representative
- Surviving Spouse
The Administrator of the Estate is typically responsible for managing outstanding expenses, paying taxes, distributing inheritances, and closing necessary accounts.
If the deceased appointed a legal representative to handle tax affairs, the lawyer will gain access to the right financial information.
Surviving spouses can also take over outstanding debt duties, especially if they need to file a joint tax return for the year. Taxes can be filed jointly for the year that the death happened and sometimes the year before.
In situations where none of these people are appointed or available, the next of kin will take on the responsibility.
What Happens if You Don’t File Taxes for the Deceased?
It’s important to note that debts are not automatically forgiven when someone dies. The estate is always responsible for paying outstanding tax debts.
What happens if the estate can’t cover the amounts and the debts go unpaid?
If the responsible party fails to file taxes for a deceased person, the IRS might take legal action by placing a federal lien on the estate. This means that the taxes have to be paid before other accounts or debts are closed.
Unlike a traditional lien, the IRS cannot renew a lien for a second term. If the IRS levies a tax lien against the estate upon your death, your family can try to get the lien removed once the statute of limitations expires.
The IRS can demand that the legal representative pay the taxes for the deceased if the estate does not.
Funeral expenses can be paid before outstanding taxes.
If the deceased owes a high tax amount, such as years worth of taxes, the estate can work with the IRS. The estate must prove they weren’t aware of the outstanding amounts. Fiscal Solutions Group can help them work with the IRS.
When Should You Prepare Your Estate?
Owed tax debt when you die can place a financial burden on family members. The best way to avoid unpaid tax debt problems upon death is by preparing an Estate Plan.
Completing a thorough Estate Plan lets you nominate a legal representative. Make sure this person knows you are naming them to handle your taxes and finances.
Beneficiaries named in the estate aren’t responsible for debts left by the deceased. By law, creditors cannot enforce responsibility on them.
These accounts do not have to be used to pay for owed tax debts:
- Qualifying retirement accounts
- Life insurance proceeds
- Funds in some trusts
Instead, these funds go to the beneficiary and do not pass through probate.
Are There Situations Where Relatives Have to Pay?
Generally, beneficiaries are not responsible for tax debt when you die. However, there are payment obligations for the following individuals:
- Cosigners for a loan with the deceased
- Joint account holders with the deceased
- Anyone who shares the debt of the deceased
- Residents of states where the law requires a surviving spouse to pay off some debts
The estate’s executor might also be held accountable for the tax bill, if:
- The executor distributes assets to beneficiaries and heirs before paying the taxes
- The executor pays off other debts before paying the tax liabilities
- The executor is aware of insufficient funds and spends the assets elsewhere
If a relative is the estate’s executor, they are responsible for the above.
Unpaid Tax Debt: How We Can Help
Whether you are trying to figure out how tax debts relate to your Estate Plan, or if you are the legal representative for a decedent’s Estate, we can help.
Knowing what happens to tax debt when you die can help you stay within the law.
Fiscal Solutions Group is your solution to confusing tax debt. Contact us today to learn how we can help you.