This is What Happens With Taxes When Someone Dies

When someone dies, unfortunately, at some point the heirs of the deceased person's estate or the beneficiaries of the deceased person's trust need to address taxes that will be due as the result of their loved one's death. In short, estates valued at $5.34 million or more must file a federal estate tax return using the United States Estate Tax Return.  Estates of nonresident, alien decedents that owe U.S. federal estate taxes must file the United States Estate Tax Return of nonresident or not a citizen of the United States. An inheritance tax is based on who receives the deceased person's property.  Currently only six states collect a state inheritance tax:  Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

Image courtesy Javierosh | Flickr

When someone dies, their estate will normally have to pay any tax due before any money is distributed to their heirs. The deceased could have paid too much or even too little Income Tax. As a result, the deceased’s estate may owe tax to the government, or it could be owed a tax refund. You may need to complete a self-assessment tax return if the deceased normally did one. If you’re not sure if the deceased regularly submitted a tax return, you will need to have the deceased’s National Insurance number to hand when contacting an agency to help you. Any income received after the person’s death, such as rent from a property or income from the person’s business, belongs to their estate. For this type of income, the executor must report this as part of probate, so that appropriate amount of tax is calculated and paid by the estate. If you're the executor of a deceased person's estate, your responsibilities include filing that person's final personal tax return.  Adam Greene CPA suggests three methods on how to file taxes for a deceased person:

One is gathering the complete information. In this one, first you need to gather the income reporting forms that have been mailed to the deceased person, called the decedent. These forms are usually sent after the last day of January for the previous year and should arrive by the end of February. To complete the request to the IRS, you will need the decedent’s complete name, address and social security number, a copy of the death certificate, a notice concerning fiduciary relationship or a copy of Letters Testamentary approved by the court. Then decide whether to file a joint return. If the decedent was married at the time of death, a joint tax return may be filed for that tax year. And finally, for accounts such as mutual funds and bank accounts, change the ownership to your name as the executor as soon as possible.

Image courtesy Images Money | Flickr

Another is to file the final personal Tax Return. First, you need to calculate the person's reportable income. Income earned between the start of the year and the date of the person's death should be reported on the final tax return. Then you must list income, exemptions and deductions just as you would for yourself. If you choose not to itemize, you can take the full standard deduction. If the decedent didn't file taxes in the years preceding his or her death, you may have to file individual incomes for those years as well. If the decedent is due a refund, you can claim it using Statement of a Person Claiming Refund Due a Deceased Taxpayer. And last, write the word "deceased" across the top of form, including the decedent's name and the date of death. Also you must add a specific word in place of the person´s signature at the bottom of the form, depending if you are the spouse or not. If not, add the word “deceased”, and if you are the spouse, add "filing as surviving spouse”.

The third method is filing the Estate Tax Return. For this, you can collect information needed to file estate taxes. If the estate generates more than $600 in annual gross income, a separate tax form must be used to file estate taxes, in addition to personal income taxes. Then, file estate taxes. US Income Tax Return for Estates and Trusts, is the form you need to report income, gains, losses, etc., related to the decedent's estate. A decedent's estate figures its gross income the same way an individual would; however, a decedent's estate is allowed an income distribution deduction for distributions to beneficiaries. And then, you must report a transfer of assets using United States Estate Tax Return. This form is used to report the transfer of assets from the decedent to heirs or beneficiaries. And to conclude using this method, you need to apply for a Certificate of Discharge before selling property. To apply, you will need the inventory and appraisement of the estate assets, copy of the will, and copies of documents related to the sale of property. This releases the property from the automatic federal tax lien that is attached to a person's estate the day he or she dies.

A Brief Look at Tax Changes Throughout US History

Image courtesy Jimmie | Flickr

Benjamin franklin said it “In this world, nothing can be said to be certain, except death and taxes”. And he was totally right. Taxes have been in our lives forever, since we can remember our grandparents paid taxes, our parents paid taxes and we ended up paying taxes as well. We also know that these taxes tend to change, not to be cheaper or softer, and tend to regulate almost any activity in our day to day lives.

But how has taxation changed in the United States? More importantly, what are those changes that have marked the history of the tax system in the Unites States? Surprisingly, at the beginning, America was tax-free for much of its early history. At least, it was free of direct taxation like income tax. We have to remember that it was taxation that led to the revolution against the British in 1773 and after that, one of the first challenges the new system faced was the Whiskey Rebellion. This rebellion was all about groups of Pennsylvanian farmers angry about the tax on whiskey burning down tax collectors' houses and tarring and feathering any collectors too slow to get away. It is well remembered because the congress handled the situation using military force because they had the right to collect indirect taxes for the nation.

Since this date, taxation has had many changes, some good and necessary, others not so favourable for some people and at times unfair. Let’s take a look at those moments in taxation history that are worthy to remember and that gave an amazing boost to the North American economy.

Near the previous date, in 1790, taxation had a big addition to its variety. A war with France led the government to impose a property tax and a further modification to it in 1812 with the first income tax approach after a civil war. Of course the consequences of the war, specially a war against oneself as a civil war is, are totally negative. The American Civil War was very expensive for the nation because there was an amazing rate of debt that had to be acquired in order to carry out such war. In order to help pay for the war, the Congress passed the Revenue Act of 1861 which taxed incomes exceeding $800, and was not rescinded until 1872. Many scholars consider that it was this act that created most of what it is considered as the modern tax system. That same year the U.S. Internal Revenue Service (IRS) was founded as a consequence of arranging such taxes and making the government machinery work perfectly.

In 1895 there was a big game changer.  Although the Constitution forbade any direct taxes that were not levied in proportion to each state's population, the Supreme Court declared a flat tax contained in the 1894 Wilson-Gorman Tariff Act unconstitutional. This was a huge victory for all the taxpayers because now it was a bit fairer the way they were going to be charged for their taxes. This started a feeling in people´s hearts that taxes could also bring negative consequences to world trade and for underprivileged people. After this, the 16th Amendment was introduced in 1913 and that gave way to one type of income tax for the population and a further income tax for people with an annual income of over $3,000. This tax touched less than 1% of Americans and gave the government the possibility to control high incomes that came from anonymous societies or big partnerships and that were free from being charged as a group. (This was one of the mechanisms used to get to Al Capone´s finances and money movements)  

Image courtesy DonkeyHotey | Flickr

For the Second World War and for his new approach to the country called The New Deal, Roosevelt introduced many taxes and increased many others. For Roosevelt´s New Deal there was a huge deficit that had to be covered by imposing and collecting more taxes. By the end of 1936 there was a top tax rate 76% and the economy couldn’t take it. Taxes were then raised several more times and only the corporate tax changed for good lowering its tariff. The war came and America needed money to support their allies so a more aggressive taxation was imposed. By 1945, 43 million Americans paid tax and the amount of taxes collected went from $9 billion in 1941 to $45 billion in 1945.

All these changes in taxation in the United States came after big issues in the government or society or after wars in and outside of the country. We all know that taxes are totally necessary, but we also known that those same taxes make our lives a little bit more difficult. Learn more about taxation in this article

Navigating the Differences Between Corporate and Individual Income Taxes

Image courtesy Alan Cleaver | Flickr

Here's a bit of trivia: What type of tax is so often misunderstood that economists label it indefensible and inefficient? The same tax results in notable contortions in economic activity. Although it's supported by the average layperson on the street, very few people even know who bears the burden of such a tax, and many mistakenly attribute the payer as someone it isn't. Unsure? The answer is the corporate income tax.

Just as many consumers (incorrectly) believe corporations pay the corporate income tax, many business owners and managers (incorrectly) assume that the burden is passed along to consumers. Meanwhile, this example of the corporate cat chasing its tail explains why the tax remains popular among politicians. 

There are two significant ways that corporate taxes differ from individual taxes, and recognizing them may save you a lot of time and money. First, the corporate tax is only applicable to organizations identified as corporation's not to partnerships or sole proprietorships. Secondly, the money collected is only assessed on profits, or net income not a corporation's gross income. 

Federal tax rates vary according to different brackets of income, with graduated levels of payment between 15 and 39 percent. Corporations with less than $50,000 of taxable income pay 15 percent, businesses with income between $50,000 and $75,000 pay 25 percent, and rates range from 34 to 39 percent for income above that level. Most corporations face the maximum rate possible.

Tax rates for individuals follows much the same pattern. As of 2016, the top personal rate for a couple filing jointly and single filers is 39.6 percent, identical to that of corporations. Individuals earning less than $37,650 must pay 10 to 15 percent, whereas individuals earning between $37,650 and $91,150 are taxed at 25 percent. Rates vary between 28 and 39.6 percent beyond those figures.

In other words, there is no appreciable difference paid on the lower end of the financial spectrum for corporations versus individuals. As income increases, however, the tax burden becomes increasingly heavy for corporations. If your business is going to pull in substantial profits, consider using the S corporation filing status or having your LLC taxed as a partnership.

States levy additional taxes on corporations, with rates typically ranging from 3 to 12 percent. Most states allow business owners to deduct federal tax expenses, so net rates vary between 1.9 to 4.9 percent. Some local areas impose another tax on corporations. Businesses avoid these costs by relocating out of areas or states with particularly high income tax rates.

Following individual income tax rates and payroll taxes, corporate income taxes garner the largest source of revenue for the federal government. In fiscal year 2015, the total revenues were expected to reach $3.8 trillion. Of this, $1.48 trillion, or 47 percent of all tax revenues, stemmed from individual tax payers. By comparison, $1.07 trillion, or 34 percent of all tax revenues, came from payroll taxes garnered from employers and employees. Corporate income taxes paid by businesses accounted for $341.7 billion, or 11 percent of all tax revenue. Smaller amounts of federal revenue resulted from other taxes, such as excise taxes and customs duties.

Few people would argue that the corporate income tax serves a purpose. Other than filling the government's pockets, it helps restrict individuals from accumulating tax-free income within corporations. It also encourages debt finance comparative to equity finance, since the interest payments of corporations are deductible, whereas dividends are not. Furthermore, the corporate income tax persuades corporations to keep earnings instead of paying dividends.

On the other hand, the imposition of taxes on corporations twice, once when earned by the corporation and again when paid out to shareholders, dissuades business owners from utilizing the corporate form of enterprise relative to non-corporate forms. This dual tax process developed years ago when corporations received state-granted benefits, such as exemption from specific laws, thereby acting as an incentive for owners to pay for such services. Now that states merely serve as registrars and tax collectors, this tax is less justified. 

Since it does exist, however, it is up to business leaders and individuals to understand the notable differences between the types of taxes and what it means to file as a corporation versus as an individual. Deciphering which tax is appropriate to your situation can be complicated. Most small business owners and high-wage individuals benefit from hiring a CPA to understand the nuances between corporate income taxes and individual income taxes. 

As tax laws continue to evolve, CPAs must stay abreast of the changes to keep licensing up to date. This can be invaluable to you, as a business leader or individual, so that you can avoid mistakes apt to lead to auditing errors. Make sure that you can have representation, in case an audit does take place. CPAs provide an in-depth and thorough analysis of, and advise about, tax and financial matters.