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H&r Block Free File 2011

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H&r Block Free File 2011

H&r block free file 2011 10. H&r block free file 2011   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. H&r block free file 2011 Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. H&r block free file 2011 Use Schedule SE to figure net earnings from self-employment. H&r block free file 2011 Sole proprietor or independent contractor. H&r block free file 2011   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. H&r block free file 2011 SE tax rate. H&r block free file 2011    For 2013, the SE tax rate on net earnings is 15. H&r block free file 2011 3% (12. H&r block free file 2011 4% social security tax plus 2. H&r block free file 2011 9% Medicare tax). H&r block free file 2011 Maximum earnings subject to self-employment tax. H&r block free file 2011    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. H&r block free file 2011 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. H&r block free file 2011   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. H&r block free file 2011 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. H&r block free file 2011   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. H&r block free file 2011 4% social security part of the SE tax on any of your net earnings. H&r block free file 2011 However, you must pay the 2. H&r block free file 2011 9% Medicare part of the SE tax on all your net earnings. H&r block free file 2011 Special Rules and Exceptions Aliens. H&r block free file 2011   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. H&r block free file 2011 S. H&r block free file 2011 citizens. H&r block free file 2011 Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. H&r block free file 2011 S. H&r block free file 2011 social security system. H&r block free file 2011 However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. H&r block free file 2011 S. H&r block free file 2011 residents for self-employment tax purposes. H&r block free file 2011 For more information on aliens, see Publication 519, U. H&r block free file 2011 S. H&r block free file 2011 Tax Guide for Aliens. H&r block free file 2011 Child employed by parent. H&r block free file 2011   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. H&r block free file 2011 Church employee. H&r block free file 2011    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. H&r block free file 2011 28 or more in wages from the church or organization. H&r block free file 2011 For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. H&r block free file 2011 Fishing crew member. H&r block free file 2011   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. H&r block free file 2011 You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. H&r block free file 2011 The pay is not more than $100 per trip. H&r block free file 2011 The pay is received only if there is a minimum catch. H&r block free file 2011 The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. H&r block free file 2011 You get a share of the catch or a share of the proceeds from the sale of the catch. H&r block free file 2011 Your share depends on the amount of the catch. H&r block free file 2011 The boat's operating crew normally numbers fewer than 10 individuals. H&r block free file 2011 (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. H&r block free file 2011 ) Notary public. H&r block free file 2011   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). H&r block free file 2011 State or local government employee. H&r block free file 2011   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. H&r block free file 2011 Foreign government or international organization employee. H&r block free file 2011   You are subject to SE tax if both the following conditions are true. H&r block free file 2011 You are a U. H&r block free file 2011 S. H&r block free file 2011 citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. H&r block free file 2011 Your employer is not required to withhold social security and Medicare taxes from your wages. H&r block free file 2011 U. H&r block free file 2011 S. H&r block free file 2011 citizen or resident alien residing abroad. H&r block free file 2011    If you are a self-employed U. H&r block free file 2011 S. H&r block free file 2011 citizen or resident alien living outside the United States, in most cases you must pay SE tax. H&r block free file 2011 Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. H&r block free file 2011 Exception. H&r block free file 2011    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. H&r block free file 2011 Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. H&r block free file 2011 The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. H&r block free file 2011   For more information, see the Instructions for Schedule SE (Form 1040). H&r block free file 2011 More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. H&r block free file 2011 A loss from one business reduces your profit from another business. H&r block free file 2011 Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. H&r block free file 2011 Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. H&r block free file 2011 It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. H&r block free file 2011 Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. H&r block free file 2011 If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. H&r block free file 2011 Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. H&r block free file 2011 The regular method. H&r block free file 2011 The nonfarm optional method. H&r block free file 2011 The farm optional method. H&r block free file 2011 You must use the regular method unless you are eligible to use one or both of the optional methods. H&r block free file 2011 Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. H&r block free file 2011 You want to receive credit for social security benefit coverage. H&r block free file 2011 You incurred child or dependent care expenses for which you could claim a credit. H&r block free file 2011 (An optional method may increase your earned income, which could increase your credit. H&r block free file 2011 ) You are entitled to the earned income credit. H&r block free file 2011 (An optional method may increase your earned income, which could increase your credit. H&r block free file 2011 ) You are entitled to the additional child tax credit. H&r block free file 2011 (An optional method may increase your earned income, which could increase your credit. H&r block free file 2011 ) Effects of using an optional method. H&r block free file 2011   Using an optional method could increase your SE tax. H&r block free file 2011 Paying more SE tax could result in your getting higher benefits when you retire. H&r block free file 2011   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. H&r block free file 2011   The optional methods may be used only to figure your SE tax. H&r block free file 2011 To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. H&r block free file 2011 Regular Method Multiply your total earnings subject to SE tax by 92. H&r block free file 2011 35% (. H&r block free file 2011 9235) to get your net earnings under the regular method. H&r block free file 2011 See Short Schedule SE, line 4, or Long Schedule SE, line 4a. H&r block free file 2011 Net earnings figured using the regular method are also called actual net earnings. H&r block free file 2011 Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. H&r block free file 2011 You may use this method if you meet all the following tests. H&r block free file 2011 You are self-employed on a regular basis. H&r block free file 2011 This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. H&r block free file 2011 The net earnings can be from either farm or nonfarm earnings or both. H&r block free file 2011 You have used this method less than 5 years. H&r block free file 2011 (There is a 5-year lifetime limit. H&r block free file 2011 ) The years do not have to be one after another. H&r block free file 2011 Your net nonfarm profits were: Less than $5,024, and Less than 72. H&r block free file 2011 189% of your gross nonfarm income. H&r block free file 2011 Net nonfarm profits. H&r block free file 2011   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). H&r block free file 2011   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. H&r block free file 2011 Gross nonfarm income. H&r block free file 2011   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). H&r block free file 2011 Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. H&r block free file 2011 Table 10-1. H&r block free file 2011 Figuring Nonfarm Net Earnings IF your gross nonfarm income is. H&r block free file 2011 . H&r block free file 2011 . H&r block free file 2011 THEN your net earnings are equal to. H&r block free file 2011 . H&r block free file 2011 . H&r block free file 2011 $6,960 or less Two-thirds of your gross nonfarm income. H&r block free file 2011 More than $6,960 $4,640 Actual net earnings. H&r block free file 2011   Your actual net earnings are 92. H&r block free file 2011 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. H&r block free file 2011 35% (. H&r block free file 2011 9235) to get actual net earnings). H&r block free file 2011 Actual net earnings are equivalent to net earnings figured using the regular method. H&r block free file 2011 Optional net earnings less than actual net earnings. H&r block free file 2011   You cannot use this method to report an amount less than your actual net earnings from self-employment. H&r block free file 2011 Gross nonfarm income of $6,960 or less. H&r block free file 2011   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. H&r block free file 2011 Example 1. H&r block free file 2011 Net nonfarm profit less than $5,024 and less than 72. H&r block free file 2011 189% of gross nonfarm income. H&r block free file 2011 Ann Green runs a craft business. H&r block free file 2011 Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. H&r block free file 2011 She meets the test for being self-employed on a regular basis. H&r block free file 2011 She has used the nonfarm optional method less than 5 years. H&r block free file 2011 Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . H&r block free file 2011 9235). H&r block free file 2011 Because her net profit is less than $5,024 and less than 72. H&r block free file 2011 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). H&r block free file 2011 Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. H&r block free file 2011 Example 2. H&r block free file 2011 Net nonfarm profit less than $5,024 but not less than 72. H&r block free file 2011 189% of gross nonfarm income. H&r block free file 2011 Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. H&r block free file 2011 She must use the regular method to figure her net earnings. H&r block free file 2011 She cannot use the nonfarm optional method because her net profit is not less than 72. H&r block free file 2011 189% of her gross income. H&r block free file 2011 Example 3. H&r block free file 2011 Net loss from a nonfarm business. H&r block free file 2011 Assume that in Example 1 Ann has a net loss of $700. H&r block free file 2011 She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. H&r block free file 2011 Example 4. H&r block free file 2011 Nonfarm net earnings less than $400. H&r block free file 2011 Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. H&r block free file 2011 In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. H&r block free file 2011 Gross nonfarm income of more than $6,960. H&r block free file 2011   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. H&r block free file 2011 Example 1. H&r block free file 2011 Net nonfarm profit less than $5,024 and less than 72. H&r block free file 2011 189% of gross nonfarm income. H&r block free file 2011 John White runs an appliance repair shop. H&r block free file 2011 His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. H&r block free file 2011 He meets the test for being self-employed on a regular basis. H&r block free file 2011 He has used the nonfarm optional method less than 5 years. H&r block free file 2011 His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . H&r block free file 2011 9235). H&r block free file 2011 Because his net profit is less than $5,024 and less than 72. H&r block free file 2011 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. H&r block free file 2011 Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. H&r block free file 2011 Example 2. H&r block free file 2011 Net nonfarm profit not less than $5,024. H&r block free file 2011 Assume that in Example 1 John's net profit is $5,400. H&r block free file 2011 He must use the regular method. H&r block free file 2011 He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. H&r block free file 2011 Example 3. H&r block free file 2011 Net loss from a nonfarm business. H&r block free file 2011 Assume that in Example 1 John has a net loss of $700. H&r block free file 2011 He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. H&r block free file 2011 Farm Optional Method Use the farm optional method only for earnings from a farming business. H&r block free file 2011 See Publication 225 for information about this method. H&r block free file 2011 Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. H&r block free file 2011 To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. H&r block free file 2011 Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. H&r block free file 2011 Add the net earnings figured under each method to arrive at your total net earnings from self-employment. H&r block free file 2011 You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. H&r block free file 2011 If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. H&r block free file 2011 Example. H&r block free file 2011 You are a self-employed farmer. H&r block free file 2011 You also operate a retail grocery store. H&r block free file 2011 Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. H&r block free file 2011 Table 10-2. H&r block free file 2011 Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. H&r block free file 2011 Method 1. H&r block free file 2011 Using the regular method for both farm and nonfarm income. H&r block free file 2011 Method 2. H&r block free file 2011 Using the optional method for farm income and the regular method for nonfarm income. H&r block free file 2011 Method 3. H&r block free file 2011 Using the regular method for farm income and the optional method for nonfarm income. H&r block free file 2011 Method 4. H&r block free file 2011 Using the optional method for both farm and nonfarm income. H&r block free file 2011 Note. H&r block free file 2011 Actual net earnings is the same as net earnings figured using the regular method. H&r block free file 2011 Table 10-3. H&r block free file 2011 Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. H&r block free file 2011 Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. H&r block free file 2011 Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. H&r block free file 2011 Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. H&r block free file 2011 Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. H&r block free file 2011 Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. H&r block free file 2011 However, certain taxpayers must use Section B—Long Schedule SE. H&r block free file 2011 If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. H&r block free file 2011 Joint return. H&r block free file 2011   Even if you file a joint return, you cannot file a joint Schedule SE. H&r block free file 2011 This is true whether one spouse or both spouses have earnings subject to SE tax. H&r block free file 2011 If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. H&r block free file 2011 However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. H&r block free file 2011 Attach both schedules to the joint return. H&r block free file 2011 More than one business. H&r block free file 2011   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. H&r block free file 2011 A loss from one business will reduce your profit from another business. H&r block free file 2011 File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. H&r block free file 2011 Example. H&r block free file 2011 You are the sole proprietor of two separate businesses. H&r block free file 2011 You operate a restaurant that made a net profit of $25,000. H&r block free file 2011 You also have a cabinetmaking business that had a net loss of $500. H&r block free file 2011 You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. H&r block free file 2011 You file Schedule SE showing total earnings subject to SE tax of $24,500. H&r block free file 2011 Prev  Up  Next   Home   More Online Publications
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The H&r Block Free File 2011

H&r block free file 2011 Publication 559 - Main Content Table of Contents Personal RepresentativeDuties Fees Received by Personal Representatives Final Income Tax Return for Decedent—Form 1040Name, Address, and Signature When and Where To File Filing Requirements Income To Include Exemptions and Deductions Credits, Other Taxes, and Payments Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Filing Reminders Other Tax InformationTax Benefits for Survivors Income in Respect of a Decedent Deductions in Respect of a Decedent Estate Tax Deduction Gifts, Insurance, and Inheritances Other Items of Income Income Tax Return of an Estate— Form 1041Filing Requirements Income To Include Exemption and Deductions Credits, Tax, and Payments Name, Address, and Signature When and Where To File Distributions to BeneficiariesIncome That Must Be Distributed Currently Other Amounts Distributed Discharge of a Legal Obligation Character of Distributions How and When To Report Bequest Termination of Estate Estate and Gift TaxesApplicable Credit Amount Gift Tax Estate Tax Generation-Skipping Transfer Tax Comprehensive ExampleFinal Return for Decedent—Form 1040 Income Tax Return of an Estate—Form 1041 How To Get Tax HelpLow Income Taxpayer Clinics Personal Representative A personal representative of an estate is an executor, administrator, or anyone who is in charge of the decedent's property. H&r block free file 2011 Generally, an executor (or executrix) is named in a decedent's will to administer the estate and distribute properties as the decedent has directed. H&r block free file 2011 An administrator (or administratrix) is usually appointed by the court if no will exists, if no executor was named in the will, or if the named executor cannot or will not serve. H&r block free file 2011 In general, an executor and an administrator perform the same duties and have the same responsibilities. H&r block free file 2011 For estate tax purposes, if there is no executor or administrator appointed, qualified, and acting within the United States, the term “executor” includes anyone in actual or constructive possession of any property of the decedent. H&r block free file 2011 It includes, among others, the decedent's agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding securities of the decedent as collateral; and the debtors of the decedent who are in this country. H&r block free file 2011 Duties The primary duties of a personal representative are to collect all the decedent's assets, pay his or her creditors, and distribute the remaining assets to the heirs or other beneficiaries. H&r block free file 2011 The personal representative also must perform the following duties. H&r block free file 2011 Apply for an employer identification number (EIN) for the estate. H&r block free file 2011 File all tax returns, including income, estate and gift tax returns, when due. H&r block free file 2011 Pay the tax determined up to the date of discharge from duties. H&r block free file 2011 Other duties of the personal representative in federal tax matters are discussed in other sections of this publication. H&r block free file 2011 If any beneficiary is a nonresident alien, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for information on the personal representative's duties as a withholding agent. H&r block free file 2011 Penalty. H&r block free file 2011   There is a penalty for failure to file a tax return when due unless the failure is due to reasonable cause. H&r block free file 2011 Reliance on an agent (attorney, accountant, etc. H&r block free file 2011 ) is not reasonable cause for late filing. H&r block free file 2011 It is the personal representative's duty to file the returns for the decedent and the estate when due. H&r block free file 2011 Identification number. H&r block free file 2011   The first action you should take if you are the personal representative for the decedent is to apply for an EIN for the estate. H&r block free file 2011 You should apply for this number as soon as possible because you need to enter it on returns, statements, and other documents you file concerning the estate. H&r block free file 2011 You also must give the number to payers of interest and dividends and other payers who must file a return concerning the estate. H&r block free file 2011   You can get an EIN by applying online at www. H&r block free file 2011 irs. H&r block free file 2011 gov (click on "Apply for an EIN Online" under the Tools heading). H&r block free file 2011 Generally, if you apply online, you will receive your EIN immediately upon completing the application. H&r block free file 2011 You can also apply using Form SS-4, Application for Employer Identification Number. H&r block free file 2011 Generally, if you apply by mail, it takes about 4 weeks to get your EIN. H&r block free file 2011 See the form instructions for other ways to apply. H&r block free file 2011   Payers of interest and dividends report amounts on Forms 1099 using the identification number of the person to whom the account is payable. H&r block free file 2011 After a decedent's death, Forms 1099 must reflect the identification number of the estate or beneficiary to whom the amounts are payable. H&r block free file 2011 As the personal representative handling the estate, you must furnish this identification number to the payer. H&r block free file 2011 For example, if interest is payable to the estate, the estate's EIN must be provided to the payer and used to report the interest on Form 1099-INT, Interest Income. H&r block free file 2011 If the interest is payable to a surviving joint owner, the survivor's identification number, such as an SSN or ITIN, must be provided to the payer and used to report the interest. H&r block free file 2011   If the estate or a survivor may receive interest or dividends after you inform the payer of the decedent's death, the payer should give you (or the survivor) a Form W-9, Request for Taxpayer Identification Number and Certification (or a similar substitute form). H&r block free file 2011 Complete this form to inform the payer of the estate's (or if completed by the survivor, the survivor's) identification number and return it to the payer. H&r block free file 2011    Do not use the deceased individual's identifying number to file an individual income tax return after the decedent's final tax return. H&r block free file 2011 Also do not use it to make estimated tax payments for a tax year after the year of death. H&r block free file 2011 Penalty. H&r block free file 2011   If you do not include the EIN or the taxpayer identification number of another person where it is required on a return, statement, or other document, you are liable for a penalty for each failure, unless you can show reasonable cause. H&r block free file 2011 You also are liable for a penalty if you do not give the taxpayer identification number of another person when required on a return, statement, or other document. H&r block free file 2011 Notice of fiduciary relationship. H&r block free file 2011   The term fiduciary means any person acting for another person. H&r block free file 2011 It applies to persons who have positions of trust on behalf of others. H&r block free file 2011 A personal representative for a decedent's estate is a fiduciary. H&r block free file 2011 Form 56. H&r block free file 2011   If you are appointed to act in a fiduciary capacity for another, you must file a written notice with the IRS stating this. H&r block free file 2011 Form 56, Notice Concerning Fiduciary Relationship, is used for this purpose. H&r block free file 2011 See the Instructions for Form 56 for filing requirements and other information. H&r block free file 2011   File Form 56 as soon as all the necessary information (including the EIN) is available. H&r block free file 2011 It notifies the IRS that you, as the fiduciary, are assuming the powers, rights, duties, and privileges of the decedent. H&r block free file 2011 The notice remains in effect until you notify the IRS (by filing another Form 56) that your fiduciary relationship with the estate has terminated. H&r block free file 2011 Termination of fiduciary relationship. H&r block free file 2011   Form 56 should also be filed to notify the IRS if your fiduciary relationship is terminated or when a successor fiduciary is appointed if the estate has not been terminated. H&r block free file 2011 See Form 56 and its instructions for more information. H&r block free file 2011   At the time of termination of the fiduciary relationship, you may want to file Form 4810, Request for Prompt Assessment Under Internal Revenue Code Section 6501(d), and Form 5495, Request for Discharge From Personal Liability Under Internal Revenue Code Section 2204 or 6905, to wind up your duties as fiduciary. H&r block free file 2011 See below for a discussion of these forms. H&r block free file 2011 Request for prompt assessment (charge) of tax. H&r block free file 2011   The IRS ordinarily has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any additional tax due. H&r block free file 2011 However, as a personal representative, you may request a prompt assessment of tax after the return has been filed. H&r block free file 2011 This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. H&r block free file 2011 This request can be made for any tax return (except the estate tax return) of the decedent or the decedent's estate. H&r block free file 2011 This may permit a quicker settlement of the tax liability of the estate and an earlier final distribution of the assets to the beneficiaries. H&r block free file 2011 Form 4810. H&r block free file 2011   Form 4810 can be used for making this request. H&r block free file 2011 It must be filed separately from any other document. H&r block free file 2011   As the personal representative for the decedent's estate, you are responsible for any additional taxes that may be due. H&r block free file 2011 You can request prompt assessment of any of the decedent's taxes (other than federal estate taxes) for any years for which the statutory period for assessment is open. H&r block free file 2011 This applies even though the returns were filed before the decedent's death. H&r block free file 2011 Failure to report income. H&r block free file 2011   If you or the decedent failed to report substantial amounts of gross income (more than 25% of the gross income reported on the return) or filed a false or fraudulent return, your request for prompt assessment will not shorten the period during which the IRS may assess the additional tax. H&r block free file 2011 However, such a request may relieve you of personal liability for the tax if you did not have knowledge of the unpaid tax. H&r block free file 2011 Request for discharge from personal liability for tax. H&r block free file 2011   An executor can make a request for discharge from personal liability for a decedent's income, gift, and estate taxes. H&r block free file 2011 The request must be made after the returns for those taxes are filed. H&r block free file 2011 To make the request, file Form 5495. H&r block free file 2011 For this purpose, an executor is an executor or administrator that is appointed, qualified, and acting within the United States. H&r block free file 2011   Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. H&r block free file 2011 If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. H&r block free file 2011 If the IRS has not notified the executor, he or she will be discharged from personal liability at the end of the 9-month period. H&r block free file 2011    Even if the executor is discharged from personal liability, the IRS will still be able to assess tax deficiencies against the executor to the extent he or she still has any of the decedent's property. H&r block free file 2011 Insolvent estate. H&r block free file 2011   Generally, if a decedent's estate is insufficient to pay all the decedent's debts, the debts due to the United States must be paid first. H&r block free file 2011 Both the decedent's federal income tax liabilities at the time of death and the estate's income tax liability are debts due to the United States. H&r block free file 2011 The personal representative of an insolvent estate is personally responsible for any tax liability of the decedent or of the estate if he or she had notice of such tax obligations or failed to exercise due care in determining if such obligations existed before distribution of the estate's assets and before being discharged from duties. H&r block free file 2011 The extent of such personal responsibility is the amount of any other payments made before paying the debts due to the United States, except where such other debt paid has priority over the debts due to the United States. H&r block free file 2011 Income tax liabilities need not be formally assessed for the personal representative to be liable if he or she was aware or should have been aware of their existence. H&r block free file 2011 Fees Received by Personal Representatives All personal representatives must include fees paid to them from an estate in their gross income. H&r block free file 2011 If you are not in the trade or business of being an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on your Form 1040, line 21. H&r block free file 2011 If you are in the trade or business of being an executor, report fees received from the estate as self-employment income on Schedule C or Schedule C-EZ of your Form 1040. H&r block free file 2011 If the estate operates a trade or business and you, as executor, actively participate in the trade or business while fulfilling your duties, any fees you receive related to the operation of the trade or business must be reported as self-employment income on Schedule C (or Schedule C-EZ) of your Form 1040. H&r block free file 2011 Final Income Tax Return for Decedent—Form 1040 The personal representative (defined earlier) must file the final income tax return (Form 1040) of the decedent for the year of death and any returns not filed for preceding years. H&r block free file 2011 A surviving spouse, under certain circumstances, may have to file the returns for the decedent. H&r block free file 2011 See Joint Return, later. H&r block free file 2011 Return for preceding year. H&r block free file 2011   If an individual died after the close of the tax year, but before the return for that year was filed, the return for the year just closed will not be the final return. H&r block free file 2011 The return for that year will be a regular return and the personal representative must file it. H&r block free file 2011 Example. H&r block free file 2011 Samantha Smith died on March 21, 2013, before filing her 2012 tax return. H&r block free file 2011 Her personal representative must file her 2012 return by April 15, 2013. H&r block free file 2011 Her final tax return covering the period from January 1, 2013, to March 20, 2013, is due April 15, 2014. H&r block free file 2011 Name, Address, and Signature Write the word “DECEASED,” the decedent's name, and the date of death across the top of the tax return. H&r block free file 2011 If filing a joint return, write the name and address of the decedent and the surviving spouse in the name and address fields. H&r block free file 2011 If a joint return is not being filed, write the decedent's name in the name field and the personal representative's name and address in the address field. H&r block free file 2011 Third party designee. H&r block free file 2011   You can check the “Yes” box in the Third Party Designee area on page 2 of the return to authorize the IRS to discuss the return with a friend, family member, or any other person you choose. H&r block free file 2011 This allows the IRS to call the person you identified as the designee to answer any questions that may arise during the processing of the return. H&r block free file 2011 It also allows the designee to perform certain actions. H&r block free file 2011 See the Instructions for Form 1040 for details. H&r block free file 2011 Signature. H&r block free file 2011   If a personal representative has been appointed, that person must sign the return. H&r block free file 2011 If it is a joint return, the surviving spouse must also sign it. H&r block free file 2011 If no personal representative has been appointed, the surviving spouse (on a joint return) signs the return and writes in the signature area “Filing as surviving spouse. H&r block free file 2011 ” If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative. H&r block free file 2011 ” Paid preparer. H&r block free file 2011   If you pay someone to prepare, assist in preparing, or review the tax return, that person must sign the return and fill in the other blanks in the Paid Preparer Use Only area of the return. H&r block free file 2011 See the Form 1040 instructions for details. H&r block free file 2011 When and Where To File The final income tax return is due at the same time the decedent's return would have been due had death not occurred. H&r block free file 2011 A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred. H&r block free file 2011 However, when the due date falls on a Saturday, Sunday, or legal holiday, the return is filed timely if filed by the next business day. H&r block free file 2011 The tax return must be prepared for the year of death regardless of when during the year death occurred. H&r block free file 2011 Generally, you must file the final income tax return of the decedent with the Internal Revenue Service Center for the place where you live. H&r block free file 2011 A tax return for a decedent can be electronically filed. H&r block free file 2011 A personal representative may also obtain an income tax filing extension on behalf of a decedent. H&r block free file 2011 Filing Requirements The gross income, age, and filing status of a decedent generally determine whether a return must be filed. H&r block free file 2011 Gross income is all income received by an individual from any source in the form of money, goods, property, and services that is not tax-exempt. H&r block free file 2011 It includes gross receipts from self-employment, but if the business involves manufacturing, merchandising, or mining, subtract any cost of goods sold. H&r block free file 2011 In general, filing status depends on whether the decedent was considered single or married at the time of death. H&r block free file 2011 See the income tax return instructions or Publication 501, Exemptions, Standard Deduction, and Filing Information. H&r block free file 2011 Refund A return must be filed to obtain a refund if tax was withheld from salaries, wages, pensions, or annuities, or if estimated tax was paid, even if a return is not otherwise required to be filed. H&r block free file 2011 Also, the decedent may be entitled to other credits that result in a refund. H&r block free file 2011 These advance payments of tax and credits are discussed later under Credits, Other Taxes, and Payments. H&r block free file 2011 Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. H&r block free file 2011   Form 1310 does not have to be filed if you are claiming a refund and you are: A surviving spouse filing an original or amended joint return with the decedent, or A court-appointed or certified personal representative filing the decedent’s original return and a copy of the court certificate showing your appointment is attached to the return. H&r block free file 2011   If the personal representative is filing a claim for refund on Form 1040X, Amended U. H&r block free file 2011 S. H&r block free file 2011 Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, and the court certificate has already been filed with the IRS, attach Form 1310 and write “Certificate Previously Filed” at the bottom of the form. H&r block free file 2011 Example. H&r block free file 2011 Edward Green died before filing his tax return. H&r block free file 2011 You were appointed the personal representative for Edward's estate, and you file his Form 1040 showing a refund due. H&r block free file 2011 You do not need Form 1310 to claim the refund if you attach a copy of the court certificate showing you were appointed the personal representative. H&r block free file 2011    If you are a surviving spouse and you receive a tax refund check in both your name and your deceased spouse's name, you can have the check reissued in your name alone. H&r block free file 2011 Return the joint-name check marked “VOID” to your local IRS office or the service center where you mailed your return, along with a written request for reissuance of the refund check. H&r block free file 2011 A new check will be issued in your name and mailed to you. H&r block free file 2011 Death certificate. H&r block free file 2011   When filing the decedent's final income tax return, do not attach the death certificate or other proof of death to the final return. H&r block free file 2011 Instead, keep it for your records and provide it if requested. H&r block free file 2011 Nonresident Alien If the decedent was a nonresident alien who would have had to file Form 1040NR, U. H&r block free file 2011 S. H&r block free file 2011 Nonresident Alien Income Tax Return, you must file that form for the decedent's final tax year. H&r block free file 2011 See the Instructions for Form 1040NR for the filing requirements, due date, and where to file. H&r block free file 2011 Joint Return Generally, the personal representative and the surviving spouse can file a joint return for the decedent and the surviving spouse. H&r block free file 2011 However, the surviving spouse alone can file the joint return if no personal representative has been appointed before the due date for filing the final joint return for the year of death. H&r block free file 2011 This also applies to the return for the preceding year if the decedent died after the close of the preceding tax year and before filing the return for that year. H&r block free file 2011 The income of the decedent that was includible on his or her return for the year up to the date of death (see Income To Include, later) and the income of the surviving spouse for the entire year must be included in the final joint return. H&r block free file 2011 A final joint return with the decedent cannot be filed if the surviving spouse remarried before the end of the year of the decedent's death. H&r block free file 2011 The filing status of the decedent in this instance is married filing a separate return. H&r block free file 2011 For information about tax benefits to which a surviving spouse may be entitled, see Tax Benefits for Survivors, later, under Other Tax Information. H&r block free file 2011 Personal representative may revoke joint return election. H&r block free file 2011   A court-appointed personal representative may revoke an election to file a joint return previously made by the surviving spouse alone. H&r block free file 2011 This is done by filing a separate return for the decedent within one year from the due date of the return (including any extensions). H&r block free file 2011 The joint return made by the surviving spouse will then be regarded as the separate return of that spouse by excluding the decedent's items and refiguring the tax liability. H&r block free file 2011 Relief from joint liability. H&r block free file 2011   In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. H&r block free file 2011 If the decedent qualified for this relief while alive, the personal representative can pursue an existing request, or file a request, for relief from joint liability. H&r block free file 2011 For information on requesting this relief, see Publication 971, Innocent Spouse Relief. H&r block free file 2011 Income To Include The decedent's income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. H&r block free file 2011 The method of accounting regularly used by the decedent before death also determines the income includible on the final return. H&r block free file 2011 This section explains how some types of income are reported on the final return. H&r block free file 2011 For more information about accounting methods, see Publication 538, Accounting Periods and Methods. H&r block free file 2011 Cash Method If the decedent accounted for income under the cash method, only those items actually or constructively received before death are included on the final return. H&r block free file 2011 Constructive receipt of income. H&r block free file 2011   Interest from coupons on the decedent's bonds is constructively received by the decedent if the coupons matured in the decedent's final tax year, but had not been cashed. H&r block free file 2011 Include the interest income on the final return. H&r block free file 2011   Generally, a dividend is considered constructively received if it was available for use by the decedent without restriction. H&r block free file 2011 If the corporation customarily mailed its dividend checks, the dividend was includible when received. H&r block free file 2011 If the individual died between the time the dividend was declared and the time it was received in the mail, the decedent did not constructively receive it before death. H&r block free file 2011 Do not include the dividend in the final return. H&r block free file 2011 Accrual Method Generally, under an accrual method of accounting, income is reported when earned. H&r block free file 2011 If the decedent used an accrual method, only the income items normally accrued before death are included on the final return. H&r block free file 2011 Interest and Dividend Income (Forms 1099) Form(s) 1099 reporting interest and dividends earned by the decedent before death should be received and the amounts included on the decedent's final return. H&r block free file 2011 A separate Form 1099 should show the interest and dividends earned after the date of the decedent's death and paid to the estate or other recipient that must include those amounts on its return. H&r block free file 2011 You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts. H&r block free file 2011 For example, a Form 1099-INT, reporting interest payable to the decedent, may include income that should be reported on the final income tax return of the decedent, as well as income that the estate or other recipient should report, either as income earned after death or as income in respect of the decedent (discussed later). H&r block free file 2011 For income earned after death, you should ask the payer for a Form 1099 that properly identifies the recipient (by name and identification number) and the proper amount. H&r block free file 2011 If that is not possible, or if the form includes an amount that represents income in respect of the decedent, report the interest as shown next under How to report. H&r block free file 2011 See U. H&r block free file 2011 S. H&r block free file 2011 savings bonds acquired from decedent under Income in Respect of a Decedent, later, for information on savings bond interest that may have to be reported on the final return. H&r block free file 2011 How to report. H&r block free file 2011   If you are preparing the decedent's final return and you have received a Form 1099-INT for the decedent that includes amounts belonging to the decedent and to another recipient (the decedent's estate or another beneficiary), report the total interest shown on Form 1099-INT on Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. H&r block free file 2011 Next, enter a subtotal of the interest shown on Forms 1099, and the interest reportable from other sources for which you did not receive Forms 1099. H&r block free file 2011 Then, show any interest (including any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. H&r block free file 2011 Identify the amount of this adjustment as “Nominee Distribution” or other appropriate designation. H&r block free file 2011   Report dividend income for which you received a Form 1099-DIV, Dividends and Distributions, on the appropriate schedule using the same procedure. H&r block free file 2011    Note. H&r block free file 2011 If the decedent received amounts as a nominee, you must give the actual owner a Form 1099, unless the owner is the decedent's spouse. H&r block free file 2011 See General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) for more information on filing Forms 1099. H&r block free file 2011 Partnership Income The death of a partner closes the partnership's tax year for that partner. H&r block free file 2011 Generally, it does not close the partnership's tax year for the remaining partners. H&r block free file 2011 The decedent's distributive share of partnership items must be figured as if the partnership's tax year ended on the date the partner died. H&r block free file 2011 To avoid an interim closing of the partnership books, the partners can agree to estimate the decedent's distributive share by prorating the amounts the partner would have included for the entire partnership tax year. H&r block free file 2011 On the decedent's final return, include the decedent's distributive share of partnership items for the following periods. H&r block free file 2011 The partnership's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). H&r block free file 2011 The period, if any, from the end of the partnership's tax year in (1) to the decedent's date of death. H&r block free file 2011 Example. H&r block free file 2011 Mary Smith was a partner in XYZ partnership and reported her income on a tax year ending December 31. H&r block free file 2011 The partnership uses a tax year ending June 30. H&r block free file 2011 Mary died August 31, 2013, and her estate established its tax year through August 31. H&r block free file 2011 The distributive share of partnership items based on the decedent's partnership interest is reported as follows. H&r block free file 2011 Final Return for the Decedent—January 1 through August 31, 2013, includes XYZ partnership items from (a) the partnership tax year ending June 30, 2013, and (b) the partnership tax year beginning July 1, 2013, and ending August 31, 2013 (the date of death). H&r block free file 2011 Income Tax Return of the Estate—September 1, 2013, through August 31, 2014, includes XYZ partnership items for the period September 1, 2013, through June 30, 2014. H&r block free file 2011 S Corporation Income If the decedent was a shareholder in an S corporation, include on the final return the decedent's share of the S corporation's items of income, loss, deduction, and credit for the following periods. H&r block free file 2011 The corporation's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). H&r block free file 2011 The period, if any, from the end of the corporation's tax year in (1) to the decedent's date of death. H&r block free file 2011 Self-Employment Income Include self-employment income actually or constructively received or accrued, depending on the decedent's accounting method. H&r block free file 2011 For self-employment tax purposes only, the decedent's self-employment income will include the decedent's distributive share of a partnership's income or loss through the end of the month in which death occurred. H&r block free file 2011 For this purpose, the partnership's income or loss is considered to be earned ratably over the partnership's tax year. H&r block free file 2011 Community Income If the decedent was married and domiciled in a community property state, half of the income received and half of the expenses paid during the decedent's tax year by either the decedent or spouse may be considered to be the income and expenses of the other. H&r block free file 2011 For more information, see Publication 555, Community Property. H&r block free file 2011 HSA, Archer MSA, or Medicare Advantage MSA The treatment of an HSA (health savings account), an Archer MSA (medical savings account), or a Medicare Advantage MSA at the death of the account holder, depends on who acquires the interest in the account. H&r block free file 2011 If the decedent's estate acquires the interest, the fair market value (FMV) of the assets in the account on the date of death is included in income on the decedent's final return. H&r block free file 2011 The estate tax deduction, discussed later, does not apply to this amount. H&r block free file 2011 If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. H&r block free file 2011 For other information on HSAs, Archer MSAs, or Medicare Advantage MSAs, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. H&r block free file 2011 Coverdell Education Savings Account (ESA) Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was established reaches age 30, or dies, whichever is earlier. H&r block free file 2011 The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. H&r block free file 2011 If the decedent's estate acquires the interest, the earnings on the account must be included on the final income tax return of the decedent. H&r block free file 2011 The estate tax deduction, discussed later, does not apply to this amount. H&r block free file 2011 If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. H&r block free file 2011 The age 30 limitation does not apply if the individual for whom the account was established or the beneficiary that acquires the account is an individual with special needs. H&r block free file 2011 This includes an individual who, because of a physical, mental, or emotional condition (including a learning disability), requires additional time to complete his or her education. H&r block free file 2011 For more information on Coverdell ESAs, see Publication 970, Tax Benefits for Education. H&r block free file 2011 Accelerated Death Benefits Accelerated death benefits are amounts received under a life insurance contract before the death of the insured individual. H&r block free file 2011 These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider. H&r block free file 2011 Generally, if the decedent received accelerated death benefits on the life of a terminally or chronically ill individual, whether on his or her own life or on the life of another person, those benefits are not included in the decedent's income. H&r block free file 2011 For more information, see the discussion under Gifts, Insurance, and Inheritances under Other Tax Information, later. H&r block free file 2011 Exemptions and Deductions Generally, the rules for exemptions and deductions allowed to an individual also apply to the decedent's final income tax return. H&r block free file 2011 Show on the final return deductible items the decedent paid (or accrued, if the decedent reported deductions on an accrual method) before death. H&r block free file 2011 This section contains a detailed discussion of medical expenses because the tax treatment of the decedent's medical expenses can be different. H&r block free file 2011 See Medical Expenses, later. H&r block free file 2011 Exemptions You can claim the decedent's personal exemption on the final income tax return. H&r block free file 2011 If the decedent was another person's dependent (for example, a parent's), you cannot claim the personal exemption on the decedent's final return. H&r block free file 2011 Standard Deduction If you do not itemize deductions on the final return, the full amount of the appropriate standard deduction is allowed regardless of the date of death. H&r block free file 2011 For information on the appropriate standard deduction, see the Form 1040 income tax return instructions or Publication 501. H&r block free file 2011 Medical Expenses Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. H&r block free file 2011 This includes expenses for the decedent, as well as for the decedent's spouse and dependents. H&r block free file 2011 Beginning in 2013, medical expenses exceeding 10% of adjusted gross income (AGI) may be deducted, unless the decedent or their spouse is age 65 or older. H&r block free file 2011 In that case medical expenses exceeding 7. H&r block free file 2011 5% of AGI may be deducted. H&r block free file 2011 Qualified medical expenses are not deductible if paid with a tax-free distribution from an HSA or an Archer MSA. H&r block free file 2011 Election for decedent's expenses. H&r block free file 2011   Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). H&r block free file 2011 However, if medical expenses for the decedent are paid out of the estate during the 1-year period beginning with the day after death, you can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred. H&r block free file 2011   If you make the election, you can claim all or part of the expenses on the decedent's income tax return (if deductions are itemized) rather than on the federal estate tax return (Form 706). H&r block free file 2011 You can deduct expenses incurred in the year of death on the final income tax return. H&r block free file 2011 You should file an amended return (Form 1040X) for medical expenses incurred in an earlier year, unless the statutory period for filing a claim for that year has expired. H&r block free file 2011   The amount you can deduct on the income tax return is the amount above 10% of adjusted gross income (or 7. H&r block free file 2011 5% of adjusted gross income if the decedent or the decedent's spouse was born before January 2, 1949). H&r block free file 2011 Amounts not deductible because of this percentage cannot be claimed on the federal estate tax return. H&r block free file 2011 Making the election. H&r block free file 2011   You make the election by attaching a statement, in duplicate, to the decedent's income tax return or amended return. H&r block free file 2011 The statement must state that you have not claimed the amount as an estate tax deduction, and that the estate waives the right to claim the amount as a deduction. H&r block free file 2011 This election applies only to expenses incurred for the decedent, not to expenses incurred to provide medical care for dependents. H&r block free file 2011 Example. H&r block free file 2011 Richard Brown used the cash method of accounting and filed his income tax return on a calendar year basis. H&r block free file 2011 Richard died on June 1, 2013, at the age of 78, after incurring $800 in medical expenses. H&r block free file 2011 Of that amount, $500 was incurred in 2012 and $300 was incurred in 2013. H&r block free file 2011 Richard itemized his deductions when he filed his 2012 income tax return. H&r block free file 2011 The personal representative of the estate paid the entire $800 liability in August 2013. H&r block free file 2011 The personal representative may file an amended return (Form 1040X) for 2012 claiming the $500 medical expense as a deduction, subject to the 7. H&r block free file 2011 5% limit. H&r block free file 2011 The $300 of expenses incurred in 2013 can be deducted on the final income tax return if deductions are itemized, subject to the 7. H&r block free file 2011 5% limit. H&r block free file 2011 The personal representative must file a statement in duplicate with each return stating that these amounts have not been claimed on the federal estate tax return (Form 706), and waiving the right to claim such a deduction on Form 706 in the future. H&r block free file 2011 Medical expenses not paid by estate. H&r block free file 2011   If you paid medical expenses for your deceased spouse or dependent, claim the expenses on your tax return for the year in which you paid them, whether they are paid before or after the decedent's death. H&r block free file 2011 If the decedent was a child of divorced or separated parents, the medical expenses can usually be claimed by both the custodial and noncustodial parent to the extent paid by that parent during the year. H&r block free file 2011 Insurance reimbursements. H&r block free file 2011   Insurance reimbursements of previously deducted medical expenses due a decedent at the time of death and later received by the decedent's estate are includible in the income tax return of the estate (Form 1041) for the year the reimbursements are received. H&r block free file 2011 The reimbursements are also includible in the decedent's gross estate. H&r block free file 2011 No deduction for funeral expenses can be taken on the final Form 1040 of a decedent. H&r block free file 2011 These expenses may be deductible for estate tax purposes on Form 706. H&r block free file 2011 Deduction for Losses A decedent's net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent's final income tax return. H&r block free file 2011 A net operating loss on the decedent's final income tax return can be carried back to prior years. H&r block free file 2011 (See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. H&r block free file 2011 ) You cannot deduct any unused net operating loss or capital loss on the estate's income tax return. H&r block free file 2011 At-risk loss limits. H&r block free file 2011   Special at-risk rules apply to most activities that are engaged in as a trade or business or for the production of income. H&r block free file 2011   These rules limit the deductible loss to the amount which the individual was considered at-risk in the activity. H&r block free file 2011 An individual generally will be considered at-risk to the extent of the money and the adjusted basis of property that he or she contributed to the activity and certain amounts the individual borrowed for use in the activity. H&r block free file 2011 An individual will be considered at-risk for amounts borrowed only if he or she was personally liable for the repayment or if the amounts borrowed were secured by property other than that used in the activity. H&r block free file 2011 The individual is not considered at-risk for borrowed amounts if the lender has an interest in the activity or if the lender is related to a person who has an interest in the activity. H&r block free file 2011 For more information, see Publication 925, Passive Activity and At-Risk Rules. H&r block free file 2011 Passive activity rules. H&r block free file 2011   A passive activity is any trade or business activity in which the taxpayer does not materially participate. H&r block free file 2011 To determine material participation, see Publication 925. H&r block free file 2011 Rental activities are passive activities regardless of the taxpayer's participation, unless the taxpayer meets certain eligibility requirements. H&r block free file 2011   Individuals, estates, and trusts can offset passive activity losses only against passive activity income. H&r block free file 2011 Passive activity losses or credits not allowed in one tax year can be carried forward to the next year. H&r block free file 2011   If a passive activity interest is transferred because a taxpayer dies, the accumulated unused passive activity losses are allowed as a deduction against the decedent's income in the year of death. H&r block free file 2011 Losses are allowed only to the extent they are greater than the excess of the transferee's (recipient of the interest transferred) basis in the property over the decedent's adjusted basis in the property immediately before death. H&r block free file 2011 The part of the accumulated losses equal to the excess is not allowed as a deduction for any tax year. H&r block free file 2011   Use Form 8582, Passive Activity Loss Limitations, to summarize losses and income from passive activities and to figure the amounts allowed. H&r block free file 2011 For more information, see Publication 925. H&r block free file 2011 Credits, Other Taxes, and Payments Discussed below are some of the tax credits, types of taxes that may be owed, income tax withheld, and estimated tax payments reported on the final return of a decedent. H&r block free file 2011 Credits On the final income tax return, you can claim any tax credits that applied to the decedent before death. H&r block free file 2011 Some of these credits are discussed next. H&r block free file 2011 Earned income credit. H&r block free file 2011   If the decedent was an eligible individual, you can claim the earned income credit on the decedent's final return even though the return covers less than 12 months. H&r block free file 2011 If the allowable credit is more than the tax liability for the year, the excess is refunded. H&r block free file 2011   For more information, see Publication 596, Earned Income Credit (EIC). H&r block free file 2011 Credit for the elderly or the disabled. H&r block free file 2011   This credit is allowable on a decedent's final income tax return if the decedent met both of the following requirements in the year of death. H&r block free file 2011 The decedent: Was a “qualified individual,” and Had income (adjusted gross income (AGI) and nontaxable social security and pensions) less than certain limits. H&r block free file 2011   For details on qualifying for or figuring the credit, see Publication 524, Credit for the Elderly or the Disabled. H&r block free file 2011 Child tax credit. H&r block free file 2011   If the decedent had a qualifying child, you may be able to claim the child tax credit on the decedent's final return even though the return covers less than 12 months. H&r block free file 2011 You may be able to claim the additional child tax credit and get a refund if the credit is more than the decedent's liability. H&r block free file 2011 For more information, see the Instructions for Form 1040. H&r block free file 2011 Adoption credit. H&r block free file 2011   Depending upon when the adoption was finalized, this credit may be taken on a decedent's final income tax return if the decedent: Adopted an eligible child and paid qualified adoption expenses, or Has a carryforward of an adoption credit from a prior year. H&r block free file 2011   Also, if the decedent is survived by a spouse who meets the filing status of qualifying widow(er), unused adoption credit may be carried forward and used following the death of the decedent. H&r block free file 2011 See Form 8839, Qualified Adoption Expenses, and its instructions for more details. H&r block free file 2011 General business tax credit. H&r block free file 2011   The general business credit available to a taxpayer is limited. H&r block free file 2011 Any credit arising in a tax year beginning before 1998 that has not been used up can be carried forward for up to 15 years. H&r block free file 2011 Any unused credit arising in a tax year beginning after 1997 has a 1-year carryback and a 20-year carryforward period. H&r block free file 2011   After the carryforward period, a deduction may be allowed for any unused business credit. H&r block free file 2011 If the taxpayer dies before the end of the carryforward period, the deduction generally is allowed in the year of death. H&r block free file 2011   For more information on the general business credit, see Publication 334, Tax Guide for Small Business. H&r block free file 2011 Other Taxes Taxes other than income tax that may be owed on the final return of a decedent include self-employment tax and alternative minimum tax, which are reported on Form 1040. H&r block free file 2011 Self-employment tax. H&r block free file 2011   Self-employment tax may be owed on the final return if either of the following applied to the decedent in the year of death: Net earnings from self-employment (excluding income described in (2)) were $400 or more; or Wages from services performed as a church employee were $108. H&r block free file 2011 28 or more. H&r block free file 2011 Alternative minimum tax (AMT). H&r block free file 2011   The tax laws give special treatment to certain types of income and allow special deductions and credits for certain types of expenses. H&r block free file 2011 The alternative minimum tax (AMT) was enacted so taxpayers who benefit from these laws still pay at least a minimum amount of tax. H&r block free file 2011 In general, the AMT is the excess of the tentative minimum tax over the regular tax shown on the return. H&r block free file 2011 Form 6251. H&r block free file 2011    Use Form 6251, Alternative Minimum Tax—Individuals, to determine if this tax applies to the decedent. H&r block free file 2011 See the form instructions for information on when you must attach Form 6251 to Form 1040. H&r block free file 2011 Form 8801. H&r block free file 2011   If the decedent paid AMT in a previous year or had a credit carryforward, the decedent may be eligible for a minimum tax credit. H&r block free file 2011 See Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts. H&r block free file 2011 Payments of Tax The income tax withheld from the decedent's salary, wages, pensions, or annuities, and the amount paid as estimated tax are credits (advance payments of tax) that must be claimed on the final return. H&r block free file 2011 Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Income tax liability may be forgiven for a decedent who dies due to service in a combat zone, due to military or terrorist actions, as a result of a terrorist attack, or while serving in the line of duty as an astronaut. H&r block free file 2011 Combat Zone If a member of the Armed Forces of the United States dies while in active service in a combat zone or from wounds, disease, or injury incurred in a combat zone, the decedent's income tax liability is abated (forgiven) for the entire year in which death occurred and for any prior tax year ending on or after the first day the person served in a combat zone in active service. H&r block free file 2011 For this purpose, a qualified hazardous duty area is treated as a combat zone. H&r block free file 2011 If the tax (including interest, additions to the tax, and additional amounts) for these years has been assessed, the assessment will be forgiven. H&r block free file 2011 If the tax has been collected (regardless of the date of collection), that tax will be credited or refunded. H&r block free file 2011 Any of the decedent's income tax for tax years before those mentioned above that remains unpaid as of the actual (or presumptive) date of death will not be assessed. H&r block free file 2011 If any unpaid tax (including interest, additions to the tax, and additional amounts) has been assessed, this assessment will be forgiven. H&r block free file 2011 Also, if any tax was collected after the date of death, that amount will be credited or refunded. H&r block free file 2011 The date of death of a member of the Armed Forces reported as missing in action or as a prisoner of war is the date his or her name is removed from missing status for military pay purposes. H&r block free file 2011 This is true even if death actually occurred earlier. H&r block free file 2011 For other tax information for members of the Armed Forces, see Publication 3, Armed Forces' Tax Guide. H&r block free file 2011 Military or Terrorist Actions The decedent's income tax liability is forgiven if, at death, he or she was a military or civilian employee of the United States who died because of wounds or injury incurred: While a U. H&r block free file 2011 S. H&r block free file 2011 employee, and In a military or terrorist action. H&r block free file 2011 The forgiveness applies to the tax year in which death occurred and for any earlier tax year, beginning with the year before the year in which the wounds or injury occurred. H&r block free file 2011 Example. H&r block free file 2011 The income tax liability of a civilian employee of the United States who died in 2013 because of wounds incurred while a U. H&r block free file 2011 S. H&r block free file 2011 employee in a terrorist attack that occurred in 2008 will be forgiven for 2013 and for all prior tax years in the period 2007 through 2012. H&r block free file 2011 Refunds are allowed for the tax years for which the period for filing a claim for refund has not ended, as discussed later. H&r block free file 2011 Military or terrorist action defined. H&r block free file 2011   A military or terrorist action means the following. H&r block free file 2011 Any terrorist activity that most of the evidence indicates was directed against the United States or any of its allies. H&r block free file 2011 Any military action involving the U. H&r block free file 2011 S. H&r block free file 2011 Armed Forces and resulting from violence or aggression against the United States or any of its allies, or the threat of such violence or aggression. H&r block free file 2011   Terrorist activity includes criminal offenses intended to coerce, intimidate, or retaliate against the government or civilian population. H&r block free file 2011 Military action does not include training exercises. H&r block free file 2011 Any multinational force in which the United States is participating is treated as an ally of the United States. H&r block free file 2011 Determining if a terrorist activity or military action has occurred. H&r block free file 2011   You may rely on published guidance from the IRS to determine if a particular event is considered a terrorist activity or military action. H&r block free file 2011 Specified Terrorist Victim The Victims of Terrorism Tax Relief Act of 2001 (the Act) provides tax relief for those injured or killed as a result of terrorist attacks, certain survivors of those killed as a result of terrorist attacks, and others who were affected by terrorist attacks. H&r block free file 2011 Under the Act, the federal income tax liability of those killed in the following attacks (specified terrorist victim) is forgiven for certain tax years. H&r block free file 2011 The April 19, 1995, terrorist attack on the Alfred P. H&r block free file 2011 Murrah Federal Building (Oklahoma City). H&r block free file 2011 The September 11, 2001, terrorist attacks. H&r block free file 2011 The terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002. H&r block free file 2011 The Act also exempts from federal income tax the following types of income. H&r block free file 2011 Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack. H&r block free file 2011 Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack. H&r block free file 2011 Certain death benefits paid by an employer to the survivor of an employee because the employee died as a result of a terrorist attack. H&r block free file 2011 Payments from the September 11th Victim Compensation Fund 2001. H&r block free file 2011 The Act also reduces the estate tax of individuals who die as a result of a terrorist attack. H&r block free file 2011 See Publication 3920, Tax Relief for Victims of Terrorist Attacks, for more information. H&r block free file 2011 Astronauts Legislation extended the tax relief available under the Victims of Terrorism Tax Relief Act of 2001 (the Act) to astronauts who died in the line of duty after December 31, 2002. H&r block free file 2011 The decedent's income tax liability is forgiven for the tax year in which death occurs, and for the tax year prior to death. H&r block free file 2011 For information on death benefit payments and the reduction of federal estate taxes, see Publication 3920. H&r block free file 2011 However, the discussions in that publication under Death Benefits and Estate Tax Reduction should be modified for astronauts (for example, by using the date of death of the astronaut instead of September 11, 2001). H&r block free file 2011 For more information on the Act, see Publication 3920. H&r block free file 2011 Claim for Credit or Refund If any of these tax-forgiveness situations applies to a prior year tax, any tax paid for which the period for filing a claim has not ended will be credited or refunded. H&r block free file 2011 If any tax is still due, it will be canceled. H&r block free file 2011 The normal period for filing a claim for credit or refund is 3 years after the return was filed or 2 years after the tax was paid, whichever is later. H&r block free file 2011 If death occurred in a combat zone or from wounds, disease, or injury incurred in a combat zone, the period for filing the claim is extended by: The amount of time served in the combat zone (including any period in which the individual was in missing status), plus The period of continuous qualified hospitalization for injury from service in the combat zone, if any, plus The next 180 days. H&r block free file 2011 Qualified hospitalization means any hospitalization outside the United States and any hospitalization in the United States of not more than 5 years. H&r block free file 2011 This extended period for filing the claim also applies to a member of the Armed Forces who was deployed outside the United States in a designated contingency operation. H&r block free file 2011 Filing a claim. H&r block free file 2011   Use the following procedures to file a claim. H&r block free file 2011 If a U. H&r block free file 2011 S. H&r block free file 2011 individual income tax return (Form 1040, 1040A, or 1040EZ) has not been filed, you should make a claim for refund of any withheld income tax or estimated tax payments by filing Form 1040. H&r block free file 2011 Form W-2, Wage and Tax Statement, must accompany all returns. H&r block free file 2011 If a U. H&r block free file 2011 S. H&r block free file 2011 individual income tax return has been filed, you should make a claim for refund by filing Form 1040X. H&r block free file 2011 You must file a separate Form 1040X for each year in question. H&r block free file 2011   You must file these returns and claims at the following address for regular mail (U. H&r block free file 2011 S. H&r block free file 2011 Postal Service). H&r block free file 2011    Internal Revenue Service 333 W. H&r block free file 2011 Pershing, P5–6503 Kansas City, MO 64108   Identify all returns and claims for refund by writing “Iraq—KIA,” “Enduring Freedom—KIA,” “Kosovo Operation—KIA,” “Desert Storm—KIA,” or “Former Yugoslavia—KIA” in bold letters on the top of page 1 of the return or claim. H&r block free file 2011 On the applicable return, write the same phrase on the line for total tax. H&r block free file 2011 If the individual was killed in a terrorist or military action, put “KITA” on the front of the return and on the line for total tax. H&r block free file 2011   Include an attachment showing the computation of the decedent's tax liability and a computation of the amount to be forgiven. H&r block free file 2011 On joint returns, make an allocation of the tax as described below under Joint returns. H&r block free file 2011 If you cannot make a proper allocation, attach a statement of all income and deductions allocable to each spouse and the IRS will make the proper allocation. H&r block free file 2011   You must attach Form 1310 to all returns and claims for refund. H&r block free file 2011 However, for exceptions to filing Form 1310, see Form 1310. H&r block free file 2011 Statement of Person Claiming Refund Due a Deceased Taxpayer, under Refund, earlier. H&r block free file 2011   You must also attach proof of death that includes a statement that the individual was a U. H&r block free file 2011 S. H&r block free file 2011 employee on the date of injury and on the date of death and died as the result of a military or terrorist action. H&r block free file 2011 For military and civilian employees of the Department of Defense, attach DD Form 1300, Report of Casualty. H&r block free file 2011 For other U. H&r block free file 2011 S. H&r block free file 2011 civilian employees killed in the United States, attach a death certificate and a certification (letter) from the federal employer. H&r block free file 2011 For other U. H&r block free file 2011 S. H&r block free file 2011 civilian employees killed overseas, attach a certification from the Department of State. H&r block free file 2011   If you do not have enough tax information to file a timely claim for refund, you can suspend the period for filing a claim by filing Form 1040X. H&r block free file 2011 Attach Form 1310, any required documentation currently available, and a statement that you will file an amended claim as soon as you have the required tax information. H&r block free file 2011 Joint returns. H&r block free file 2011   If a joint return was filed, only the decedent's part of the income tax liability is eligible for forgiveness. H&r block free file 2011 Determine the decedent's tax liability as follows. H&r block free file 2011 Figure the income tax for which the decedent would have been liable if a separate return had been filed. H&r block free file 2011 Figure the income tax for which the spouse would have been liable if a separate return had been filed. H&r block free file 2011 Multiply the joint tax liability by a fraction. H&r block free file 2011 The numerator of the fraction is the amount in (1), above. H&r block free file 2011 The denominator of the fraction is the total of (1) and (2). H&r block free file 2011   The resulting amount from (3) above is the decedent's tax liability eligible for forgiveness. H&r block free file 2011 Filing Reminders To minimize the time needed to process the decedent's final return and issue any refund, be sure to follow these procedures. H&r block free file 2011 Write “DECEASED,” the decedent's name, and the date of death across the top of the tax return. H&r block free file 2011 If a personal representative has been appointed, the personal representative must sign the return. H&r block free file 2011 If it is a joint return, the surviving spouse must also sign it. H&r block free file 2011 If you are the decedent's spouse filing a joint return with the decedent and no personal representative has been appointed, write “Filing as surviving spouse” in the area where you sign the return. H&r block free file 2011 If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative. H&r block free file 2011 ” To claim a refund for the decedent, do the following. H&r block free file 2011 If you are the decedent's spouse filing a joint return with the decedent, file only the tax return to claim the refund. H&r block free file 2011 If you are the personal representative and the return is not a joint return filed with the decedent's surviving spouse, file the return and attach a copy of the certificate that shows your appointment by the court. H&r block free file 2011 (A power of attorney or a copy of the decedent's will is not acceptable evidence of your appointment as the personal representative. H&r block free file 2011 ) If you are filing an amended return, attach Form 1310 and a copy of the certificate of appointment (or, if you have already sent the certificate of appointment to IRS, write “Certificate Previously Filed” at the bottom of Form 1310). H&r block free file 2011 If you are not filing a joint return as the surviving spouse and a personal representative has not been appointed, file the return and attach Form 1310. H&r block free file 2011 Other Tax Information Discussed below is information about the effect of an individual's death on the income tax liability of the survivors (including widows and widowers), the beneficiaries, and the estate. H&r block free file 2011 Tax Benefits for Survivors Survivors can qualify for certain benefits when filing their own income tax returns. H&r block free file 2011 Joint return by surviving spouse. H&r block free file 2011   A surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years, as explained under Qualifying widows and widowers, later. H&r block free file 2011 Decedent as your dependent. H&r block free file 2011   If the decedent qualified as your dependent for a part of the year before death, you can claim the exemption for the dependent on your tax return, regardless of when death occurred during the year. H&r block free file 2011   If the decedent was your qualifying child, you may be able to claim the child tax credit or the earned income credit. H&r block free file 2011 To determine if you qualify for the child tax credit, see the instructions for Form 1040, line 51; Form 1040A, line 33; or Form 1040NR, line 48. H&r block free file 2011 To determine if you qualify for the earned income credit, see the instructions for Form 1040, lines 64a and 64b or Form 1040A, lines 38a and 38b. H&r block free file 2011 Qualifying widows and widowers. H&r block free file 2011   If your spouse died within the 2 tax years preceding the year for which your return is being filed, you may be eligible to claim the filing status of qualifying widow(er) with dependent child and qualify to use the married-filing-jointly tax rates. H&r block free file 2011 Requirements. H&r block free file 2011   Generally, you qualify for this special benefit if you meet all of the following requirements. H&r block free file 2011 You were entitled to file a joint return with your spouse for the year of death—whether or not you actually filed jointly. H&r block free file 2011 You did not remarry before the end of the current tax year. H&r block free file 2011 You have a child, stepchild, or foster child who qualifies as your dependent for the tax year. H&r block free file 2011 You provide more than half the cost of maintaining your home, which is the principal residence of that child for the entire year except for temporary absences. H&r block free file 2011 Example. H&r block free file 2011 William Burns' wife died in 2010. H&r block free file 2011 William has not remarried and continued throughout 2011 and 2012 to maintain a home for himself and his dependent child. H&r block free file 2011 For 2010, he was entitled to file a joint return for himself and his deceased wife. H&r block free file 2011 For 2011 and 2012, he qualifies to file as a qualifying widower with dependent child. H&r block free file 2011 For later years, he may qualify to file as a head of household. H&r block free file 2011 Figuring your tax. H&r block free file 2011   Check the box on line 5 (Form 1040 or 1040A) under Filing Status on your tax return. H&r block free file 2011 Use the Tax Rate Schedule or the column in the Tax Table for Married filing jointly, which gives you the split-income benefits. H&r block free file 2011   The last year you can file jointly with, or claim an exemption for, your deceased spouse is the year of death. H&r block free file 2011 Joint return filing rules. H&r block free file 2011   If you are the surviving spouse and a personal representative is handling the estate for the decedent, you should coordinate filing your return for the year of death with this personal representative. H&r block free file 2011 See Joint Return under Final Income Tax Return for Decedent—Form 1040, earlier. H&r block free file 2011 Income in Respect of a Decedent All income the decedent would have received had death not occurred that was not properly includible on the final return, discussed earlier, is income in respect of a decedent. H&r block free file 2011 If the decedent is a specified terrorist victim (see Specified Terrorist Victim, earlier), income received after the date of death and before the end of the decedent's tax year (determined without regard to death) is excluded from the recipient's gross income. H&r block free file 2011 This exclusion does not apply to certain income. H&r block free file 2011 For more information, see Publication 3920. H&r block free file 2011 How To Report Income in respect of a decedent must be included in the income of one of the following. H&r block free file 2011 The decedent's estate, if the estate receives it. H&r block free file 2011 The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it. H&r block free file 2011 Any person to whom the estate properly distributes the right to receive it. H&r block free file 2011 If you have to include income in respect of a decedent in your gross income and an estate tax return (Form 706) was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income. H&r block free file 2011 See Estate Tax Deduction, later. H&r block free file 2011 Example 1. H&r block free file 2011 Frank Johnson owned and operated an apple orchard. H&r block free file 2011 He used the cash method of accounting. H&r block free file 2011 He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. H&r block free file 2011 The proceeds from the sale are income in respect of a decedent. H&r block free file 2011 When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. H&r block free file 2011 When Frank's widow collects the $2,000, she must include that amount in her return. H&r block free file 2011 It is not reported on the final return of the decedent or on the return of the estate. H&r block free file 2011 Example 2. H&r block free file 2011 Assume the same facts as in Example 1, except that Frank used the accrual method of accounting. H&r block free file 2011 The amount accrued from the sale of the apples would be included on his final return. H&r block free file 2011 Neither the estate nor the widow would realize income in respect of a decedent when the money is later paid. H&r block free file 2011 Example 3. H&r block free file 2011 On February 1, George High, a cash method taxpayer, sold his tractor for $3,000, payable March 1 of the same year. H&r block free file 2011 His adjusted basis in the tractor was $2,000. H&r block free file 2011 George died on February 15, before receiving payment. H&r block free file 2011 The gain to be reported as income in respect of a decedent is the $1,000 difference between the decedent's basis in the property and the sale proceeds. H&r block free file 2011 In other words, the income in respect of a decedent is the gain the decedent would have realized had he lived. H&r block free file 2011 Example 4. H&r block free file 2011 Cathy O'Neil was entitled to a large salary payment at the date of her death. H&r block free file 2011 The amount was to be paid in five annual installments. H&r block free file 2011 The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. H&r block free file 2011 The payments are income in respect of a decedent. H&r block free file 2011 None of the payments were includible on Cathy's final return. H&r block free file 2011 The estate must include in its income the two installments it received, and you must include in your income each of the three installments as you receive them. H&r block free file 2011 Example 5. H&r block free file 2011 You inherited the right to receive renewal commissions on life insurance sold by your father before his death. H&r block free file 2011 You inherited the right from your mother, who acquired it by bequest from your father. H&r block free file 2011 Your mother died before she received all the commissions she had the right to receive, so you received the rest. H&r block free file 2011 The commissions are income in respect of a decedent. H&r block free file 2011 None of these commissions were includible in your father's final return. H&r block free file 2011 The commissions received by your mother were included in her income. H&r block free file 2011 The commissions you received are not includible in your mother's income, even on her final return. H&r block free file 2011 You must include them in your income. H&r block free file 2011 Character of income. H&r block free file 2011   The character of the income you receive in respect of a decedent remains the same as it would have been to the decedent if he or she were alive. H&r block free file 2011 If the income would have been a capital gain to the decedent, it will be a capital gain to you. H&r block free file 2011 Transfer of right to income. H&r block free file 2011   If you transfer your right to income in respect of a decedent, you must include in your income the greater of: The amount you receive for the right, or The fair market value of the right you transfer. H&r block free file 2011   If you make a gift of such a right, you must include in your income the fair market value of the right at the time of the gift. H&r block free file 2011   If the right to income from an installment obligation is transferred, the amount you must include in income is reduced by the basis of the obligation. H&r block free file 2011 See Installment obligations, later. H&r block free file 2011 Transfer defined. H&r block free file 2011   A transfer for this purpose includes a sale, exchange, or other disposition, the satisfaction of an installment obligation at other than face value, or the cancellation of an installment obligation. H&r block free file 2011 Installment obligations. H&r block free file 2011   If the decedent sold property using the installment method and you are collecting payments on an installment obligation acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. H&r block free file 2011 Include in your income the same profit the decedent would have included had death not occurred. H&r block free file 2011 For more information, see Publication 537, Installment Sales. H&r block free file 2011   If you dispose of an installment obligation acquired from a decedent (other than by transfer to the obligor), the rules explained in Publication 537 for figuring gain or loss on the disposition apply to you. H&r block free file 2011 Transfer to obligor. H&r block free file 2011   A transfer of a right to income, discussed earlier, has occurred if the decedent (seller) sold property using the installment method and the installment obligation was transferred to the obligor (buyer or person legally obligated to pay the installments). H&r block free file 2011 A transfer also occurs if the obligation was canceled either at death or by the estate or person receiving the obligation from the decedent. H&r block free file 2011 An obligation that becomes unenforceable is treated as having been canceled. H&r block free file 2011   If such a transfer occurs, the amount included in the income of the transferor (the estate or beneficiary) is the greater of the amount received or the fair market value of the installment obligation at the time of transfer, reduced by the basis of the obligation. H&r block free file 2011 The basis of the obligation is the decedent's basis, adjusted for all installment payments received after the decedent's death and before the transfer. H&r block free file 2011   If the decedent and obligor were related persons, the fair market value of the obligation cannot be less than its face value. H&r block free file 2011 Specific Types of Income in Respect of a Decedent This section explains and provides examples of some specific types of income in respect of a decedent. H&r block free file 2011 Wages. H&r block free file 2011   The entire amount of wages or other employee compensation earned by the decedent but unpaid at the time of death is income in respect of a decedent. H&r block free file 2011 The income is not reduced by any amounts withheld by the employer. H&r block free file 2011 If the income is $600 or more, the employer should report it in box 3 of Form 1099-MISC, Miscellaneous Income, and give the recipient a copy of the form or a similar statement. H&r block free file 2011   Wages paid as income in respect of a decedent are not subject to federal income tax withholding. H&r block free file 2011 However, if paid during the calendar year of death, they are subject to withholding for social security and Medicare taxes. H&r block free file 2011 These taxes should be included on the decedent's Form W-2 along with the taxes withheld before death. H&r block free file 2011 These wages are not included in box 1 of Form W-2. H&r block free file 2011   Wages paid as income in respect of a decedent after the year of death generally are not subject to withholding for any federal taxe