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

Demystifying the U.S. Tax Code: How Congress Affects Business Income Taxes

The U.S. tax code forms the backbone of how the IRS operates. Despite calls for reforms during just about every session of Congress, the tax code remains complex and, in some cases, difficult to interpret. Demystifying the code may take years, or even a special degree. Ordinary citizens and business owners may not be able to make heads or tails of the U.S. tax code, but a little knowledge can go a long way.

Sources of Income Tax Law
Image Courtesy Phil Roeder | Flickr
The U.S. Constitution gives Congress authority to collect taxes as a means to provide revenue for the federal government. The 13th Amendment, ratified by the states in 1913,  gives Congress the ability to assess income taxes on individuals and entities. The income can derive from any source, such as hourly wages, investment income, profits from a business operation, and sales of physical assets. Section 61 of Title 26 within the U.S. Code enumerates exactly what counts as income, although that list does not include every possible source. Laws that start as bills in Congress may alter the tax code periodically.


How Taxes Become Law
Congress passes tax laws, and then the IRS has the authority to enforce those laws. It all starts with the House Ways and Means Committee. Members of this committee agree on which proposals should go up for debate and a vote in the full House and they craft tax legislation. The House then debates the bill and the legislative body may amend it.

If the House approves the bill, it goes to the Senate Finance Committee for review, where it undergoes the same process in the House. If the Senate approves a different version of the legislation, a joint committee between both bodies tries to come up with a compromise bill. When both sides of Congress agree and pass the same legislation, the President of the United States either signs the bill into law or vetoes it. The bill becomes a law within the U.S. tax code when the president signs it or Congress overrides a veto.


Intricacies of Tax Laws
Tax legislation, even before it goes into the tax code, is very complicated. The text of the Consolidated Appropriations Act of 2015 is 233 pages, and the behind-the-scenes work that goes into the legislative process is enormous. Congressional staffers and researchers crunch numbers, representatives and senators hear testimony about the effectiveness of tax changes, and members of the legislative body hear hours of debate before voting on a proposal. 

The tax laws passed and signed into law December 2015 include several provisions that extend tax benefits already on the books. The overall cost of this legislation comes to $622 billion over 10 years, according to estimates from Congress. The bill itself changes verbiage to various sections of the U.S. tax code, using quotes and legal citations.

Delegated Legislation Adopted by the IRS
The IRS takes the changes to the tax code and comes up with procedures, policies, instructions, and tax forms that correlate to provisions within the law. If a law changes the way a business collects an employment tax, the IRS tells businesses how to accomplish this tax collection. This also means the IRS has the authority to penalize businesses for not following the IRS rules. Rules within the IRS turn into instruction booklets and tax forms.

Some of these booklets and forms are long, complicated, and hard to read. Owners and investors must differentiate between statutory employees, independent contractors, self-employment income, small businesses, and corporations. Business owners need to know how to implement the Work Opportunity Tax Credit, parts of the Affordable Care Act, and general accounting principles that determine the value of assets, income, and revenue. Businesses that take advantage of deductions and credits can reduce their tax liability, while increases in sales and revenue may increase the taxes a business pays.

The process of tax legislation comes full circle when individuals and businesses either pay income taxes each year or receive an income tax refund. Companies usually pay estimated taxes each quarter so the entire burden of paying taxes doesn't occur on April 15 each year. Getting to the point where a company files tax returns may take some effort, depending on the size of a business, the number of employees, and the amount of income brought in by a business. 


Help for Taxes
A licensed accountant can help a company by outlining how tax laws affect the bottom line of a business. An experienced business owner knows the intricacies and minutiae of owning a business with the ultimate goal of making money. Likewise, a CPA is an expert on tax laws who can explain how a company can take advantage of tax laws by developing strategies all year long. When tax time rolls around in April, a good CPA gives a client the best way to file the most complete return possible.