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1040es

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1040es

1040es 4. 1040es   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. 1040es However, the information shown on the filled-in forms is not from any actual person or scenario. 1040es Example 1—Mortgage loan modification. 1040es    In 2007, Nancy Oak bought a main home for $435,000. 1040es Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. 1040es The loan was secured by the home. 1040es The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. 1040es In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. 1040es    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. 1040es The FMV of Nancy's home at the time of the refinancing was $500,000. 1040es Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. 1040es After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. 1040es   In 2013, Nancy was unable to make her mortgage loan payments. 1040es On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. 1040es Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. 1040es   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. 1040es Identifiable event code "F" appears in box 6. 1040es This box shows the reason the creditor has filed Form 1099-C. 1040es To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. 1040es Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. 1040es   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. 1040es Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. 1040es Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. 1040es Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). 1040es   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. 1040es Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). 1040es Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. 1040es You can see Nancy's Form 1099-C and a portion of her Form 1040 below. 1040es Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. 1040es Please click the link to view the image. 1040es Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. 1040es Please click the link to view the image. 1040es Form 1040, U. 1040es S. 1040es Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. 1040es Please click the link to view the image. 1040es Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. 1040es    In 2005, John and Mary Elm bought a main home for $335,000. 1040es John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. 1040es The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. 1040es   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. 1040es Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. 1040es   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. 1040es Identifiable event code "D" appears in box 6. 1040es This box shows the reason the creditor has filed Form 1099-C. 1040es In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. 1040es In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. 1040es Their sample Form 1099-C is shown on this page. 1040es   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). 1040es However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. 1040es   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). 1040es Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. 1040es Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. 1040es As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. 1040es Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. 1040es Thus, John and Mary leave line 10b of Form 982 blank. 1040es   John and Mary must also determine whether they have a gain or loss from the foreclosure. 1040es John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. 1040es Because this loss relates to their home, it is a nondeductible loss. 1040es   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. 1040es John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. 1040es Please click the link to view the image. 1040es Form 1099-C, Cancellation of Debt Table 1-1. 1040es Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. 1040es Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). 1040es Otherwise, go to Part 2. 1040es 1. 1040es Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. 1040es 00 2. 1040es Enter the fair market value of the transferred property $290,000. 1040es 00 3. 1040es Ordinary income from the cancellation of debt upon foreclosure or repossession. 1040es * Subtract line 2 from line 1. 1040es If less than zero, enter zero. 1040es Next, go to Part 2 $ 25,000. 1040es 00 Part 2. 1040es Gain or loss from foreclosure or repossession. 1040es   4. 1040es Enter the smaller of line 1 or line 2. 1040es If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. 1040es 00 5. 1040es Enter any proceeds you received from the foreclosure sale   6. 1040es Add line 4 and line 5 $290,000. 1040es 00 7. 1040es Enter the adjusted basis of the transferred property $335,000. 1040es 00 8. 1040es Gain or loss from foreclosure or repossession. 1040es Subtract line 7 from line 6 ($ 45,000. 1040es 00) * The income may not be taxable. 1040es See chapter 1 for more details. 1040es Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. 1040es Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. 1040es Credit card debt $ 5,500 2. 1040es Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. 1040es Car and other vehicle loans $ 4. 1040es Medical bills owed $ 5. 1040es Student loans $ 6. 1040es Accrued or past-due mortgage interest $ 7. 1040es Accrued or past-due real estate taxes $ 8. 1040es Accrued or past-due utilities (water, gas, electric) $ 9. 1040es Accrued or past-due child care costs $ 10. 1040es Federal or state income taxes remaining due (for prior tax years) $ 11. 1040es Judgments $ 12. 1040es Business debts (including those owed as a sole proprietor or partner) $ 13. 1040es Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. 1040es Other liabilities (debts) not included above $ 15. 1040es Total liabilities immediately before the cancellation. 1040es Add lines 1 through 14. 1040es $ 320,500 Part II. 1040es Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. 1040es Cash and bank account balances $ 6,000 17. 1040es Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. 1040es Cars and other vehicles $ 19. 1040es Computers $ 20. 1040es Household goods and furnishings (for example, appliances, electronics, furniture, etc. 1040es ) $ 21. 1040es Tools $ 22. 1040es Jewelry $ 23. 1040es Clothing $ 24. 1040es Books $ 25. 1040es Stocks and bonds $ 26. 1040es Investments in coins, stamps, paintings, or other collectibles $ 27. 1040es Firearms, sports, photographic, and other hobby equipment $ 28. 1040es Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. 1040es Interest in a pension plan $ 30. 1040es Interest in education accounts $ 31. 1040es Cash value of life insurance $ 32. 1040es Security deposits with landlords, utilities, and others $ 33. 1040es Interests in partnerships $ 34. 1040es Value of investment in a business $ 35. 1040es Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. 1040es Other assets not included above $ 37. 1040es FMV of total assets immediately before the cancellation. 1040es Add lines 16 through 36. 1040es $ 309,000 Part III. 1040es Insolvency 38. 1040es Amount of Insolvency. 1040es Subtract line 37 from line 15. 1040es If zero or less, you are not insolvent. 1040es $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. 1040es Please click the link to view the image. 1040es Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. 1040es    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. 1040es Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. 1040es Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. 1040es   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. 1040es The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. 1040es On December 26, 2013, the lender canceled the remaining debt. 1040es Kathy and Frank have no tax attributes other than basis of personal-use property. 1040es   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). 1040es Identifiable event code "D" appears in box 6. 1040es This box shows the reason the creditor has filed Form 1099-C. 1040es Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. 1040es Kathy and Frank are filing a joint return for 2013. 1040es   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. 1040es Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). 1040es Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. 1040es Because this loss relates to their home, it is a nondeductible loss. 1040es   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. 1040es Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. 1040es Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. 1040es The household furnishings originally cost $30,000. 1040es The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. 1040es Kathy and Frank had no adjustments to the cost basis of the car. 1040es Kathy and Frank had no other assets or liabilities at the time of the cancellation. 1040es Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). 1040es   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. 1040es Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). 1040es Kathy and Frank had no other assets or liabilities at that time. 1040es Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. 1040es   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. 1040es The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. 1040es The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. 1040es Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. 1040es Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). 1040es This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. 1040es   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. 1040es Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. 1040es Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. 1040es Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). 1040es   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. 1040es Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. 1040es Thus, Kathy and Frank leave line 10b of Form 982 blank. 1040es However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. 1040es As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. 1040es Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). 1040es Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. 1040es Kathy and Frank reduce the basis in the car by $14,956. 1040es 52 ($43,000 x $16,000/$46,000). 1040es And they reduce the basis in the household furnishings by $28,043. 1040es 48 ($43,000 x $30,000/$46,000). 1040es   Following are Kathy and Frank's sample forms and worksheets. 1040es Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. 1040es Please click the link to view the image. 1040es Form 1099-C, Cancellation of Debt Table 1-1. 1040es Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. 1040es Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). 1040es Otherwise, go to Part 2. 1040es 1. 1040es Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. 1040es 00 2. 1040es Enter the fair market value of the transferred property $1,750,000. 1040es 00 3. 1040es Ordinary income from the cancellation of debt upon foreclosure or repossession. 1040es * Subtract line 2 from line 1. 1040es If less than zero, enter zero. 1040es Next, go to Part 2 $0. 1040es 00 Part 2. 1040es Gain or loss from foreclosure or repossession. 1040es   4. 1040es Enter the smaller of line 1 or line 2. 1040es If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. 1040es $1,750,000. 1040es 00 5. 1040es Enter any proceeds you received from the foreclosure sale   6. 1040es Add line 4 and line 5 $1,750,000. 1040es 00 7. 1040es Enter the adjusted basis of the transferred property $3,000,000. 1040es 00 8. 1040es Gain or loss from foreclosure or repossession. 1040es Subtract line 7 from line 6 ($1,250,000. 1040es 00) * The income may not be taxable. 1040es See chapter 1 for more details. 1040es    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. 1040es Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. 1040es Credit card debt $ 18,000 2. 1040es Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. 1040es Car and other vehicle loans $ 4. 1040es Medical bills owed $ 5. 1040es Student loans $ 6. 1040es Accrued or past-due mortgage interest $ 7. 1040es Accrued or past-due real estate taxes $ 8. 1040es Accrued or past-due utilities (water, gas, electric) $ 9. 1040es Accrued or past-due child care costs $ 10. 1040es Federal or state income taxes remaining due (for prior tax years) $ 11. 1040es Judgments $ 12. 1040es Business debts (including those owed as a sole proprietor or partner) $ 13. 1040es Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. 1040es Other liabilities (debts) not included above $ 15. 1040es Total liabilities immediately before the cancellation. 1040es Add lines 1 through 14. 1040es $ 768,000 Part II. 1040es Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. 1040es Cash and bank account balances $ 15,000 17. 1040es Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. 1040es Cars and other vehicles $ 10,000 19. 1040es Computers $ 20. 1040es Household goods and furnishings (for example, appliances, electronics, furniture, etc. 1040es ) $ 17,000 21. 1040es Tools $ 22. 1040es Jewelry $ 23. 1040es Clothing $ 24. 1040es Books $ 25. 1040es Stocks and bonds $ 26. 1040es Investments in coins, stamps, paintings, or other collectibles $ 27. 1040es Firearms, sports, photographic, and other hobby equipment $ 28. 1040es Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. 1040es Interest in a pension plan $ 30. 1040es Interest in education accounts $ 31. 1040es Cash value of life insurance $ 32. 1040es Security deposits with landlords, utilities, and others $ 33. 1040es Interests in partnerships $ 34. 1040es Value of investment in a business $ 35. 1040es Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. 1040es Other assets not included above $ 37. 1040es FMV of total assets immediately before the cancellation. 1040es Add lines 16 through 36. 1040es $ 42,000 Part III. 1040es Insolvency 38. 1040es Amount of Insolvency. 1040es Subtract line 37 from line 15. 1040es If zero or less, you are not insolvent. 1040es $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. 1040es Please click the link to view the image. 1040es Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications
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Law Enforcement Assistance Pilot Program on Identity Theft Activity Involving the IRS

As part of its comprehensive identity theft strategy, the IRS is expanding the law enforcement assistance pilot program designed to help law enforcement obtain tax return data vital to their local efforts in investigating and prosecuting specific cases of identity theft. In addition to the initial State of Florida, this pilot program is expanding to work with law enforcement in eight additional states: Alabama, California, Georgia, New Jersey, New York, Oklahoma, Pennsylvania and Texas.

The IRS launched the initial pilot in Florida in April of 2012.  Over 750 waiver requests have been received through October from roughly 50 state and local law enforcement agencies in Florida participating in the pilot. 

Under the pilot program, state and local law enforcement officials with evidence of identity theft involving fraudulently filed federal tax returns will be able to have identity theft victims complete a special IRS disclosure form. Taxpayers must give their permission for the IRS to provide law enforcement with the returns submitted using their Social Security number. Law enforcement officials will need to contact the identity theft victims in order to request and secure the victims' consent for disclosure of the records. In certain instances, the IRS will assist law enforcement in locating taxpayers and soliciting their consent.

Law enforcement would then submit a disclosure authorization form, which the IRS created solely for use by victims of identity theft for this pilot program, to the Criminal Investigation (CI) Division of the IRS, along with a copy of the police report and the IRS Identity Theft Affidavit if available. It is important that identity theft victims still submit the original copy of the IRS Identity Theft Affidavit to the IRS according to the instructions on the back of the form that fit their specific circumstances.

Federal law imposes restrictions on sharing of taxpayer information, including information that can be shared with state and local law enforcement.  This program allows taxpayers the option to permit information to be shared with state and local law enforcement specifically to assist law enforcement officials with their efforts in pursuing identity theft perpetrators.  During this expanded pilot program, the IRS will process the disclosure forms received and forward the documentation to the law enforcement officer who requested the documents. The documents will not be sent directly to the taxpayer. However, the IRS will continue to work directly with taxpayers to resolve their tax accounts as quickly as possible.

Law enforcement in the nine states in this pilot program who are interested in working with the IRS should contact their local IRS Criminal Investigation field office.

Following the pilot, the IRS will carefully assess the results and performance before deciding on how to proceed with the program.

The IRS comprehensive identity theft strategy comprises a dual effort, focusing both on fraud prevention and victim assistance. On the prevention side, this includes implementing new processes for handling returns, new filters to detect fraud, new initiatives to partner with stakeholders and a continued commitment to investigate the criminals who perpetrate these crimes. As for victim assistance, the IRS is working to accelerate case resolution, provide more training for our employees who assist victims of identity theft, and increase outreach to and education of taxpayers so they can prevent and resolve tax-related identity theft issues quickly.

Taxpayers looking for additional information can consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on the IRS website.

Page Last Reviewed or Updated: 06-Dec-2013

The 1040es

1040es 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. 1040es Generally, an executor (or executrix) is named in a decedent's will to administer the estate and distribute properties as the decedent has directed. 1040es 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. 1040es In general, an executor and an administrator perform the same duties and have the same responsibilities. 1040es 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. 1040es 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. 1040es 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. 1040es The personal representative also must perform the following duties. 1040es Apply for an employer identification number (EIN) for the estate. 1040es File all tax returns, including income, estate and gift tax returns, when due. 1040es Pay the tax determined up to the date of discharge from duties. 1040es Other duties of the personal representative in federal tax matters are discussed in other sections of this publication. 1040es 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. 1040es Penalty. 1040es   There is a penalty for failure to file a tax return when due unless the failure is due to reasonable cause. 1040es Reliance on an agent (attorney, accountant, etc. 1040es ) is not reasonable cause for late filing. 1040es It is the personal representative's duty to file the returns for the decedent and the estate when due. 1040es Identification number. 1040es   The first action you should take if you are the personal representative for the decedent is to apply for an EIN for the estate. 1040es 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. 1040es You also must give the number to payers of interest and dividends and other payers who must file a return concerning the estate. 1040es   You can get an EIN by applying online at www. 1040es irs. 1040es gov (click on "Apply for an EIN Online" under the Tools heading). 1040es Generally, if you apply online, you will receive your EIN immediately upon completing the application. 1040es You can also apply using Form SS-4, Application for Employer Identification Number. 1040es Generally, if you apply by mail, it takes about 4 weeks to get your EIN. 1040es See the form instructions for other ways to apply. 1040es   Payers of interest and dividends report amounts on Forms 1099 using the identification number of the person to whom the account is payable. 1040es After a decedent's death, Forms 1099 must reflect the identification number of the estate or beneficiary to whom the amounts are payable. 1040es As the personal representative handling the estate, you must furnish this identification number to the payer. 1040es 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. 1040es 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. 1040es   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). 1040es 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. 1040es    Do not use the deceased individual's identifying number to file an individual income tax return after the decedent's final tax return. 1040es Also do not use it to make estimated tax payments for a tax year after the year of death. 1040es Penalty. 1040es   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. 1040es 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. 1040es Notice of fiduciary relationship. 1040es   The term fiduciary means any person acting for another person. 1040es It applies to persons who have positions of trust on behalf of others. 1040es A personal representative for a decedent's estate is a fiduciary. 1040es Form 56. 1040es   If you are appointed to act in a fiduciary capacity for another, you must file a written notice with the IRS stating this. 1040es Form 56, Notice Concerning Fiduciary Relationship, is used for this purpose. 1040es See the Instructions for Form 56 for filing requirements and other information. 1040es   File Form 56 as soon as all the necessary information (including the EIN) is available. 1040es It notifies the IRS that you, as the fiduciary, are assuming the powers, rights, duties, and privileges of the decedent. 1040es The notice remains in effect until you notify the IRS (by filing another Form 56) that your fiduciary relationship with the estate has terminated. 1040es Termination of fiduciary relationship. 1040es   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. 1040es See Form 56 and its instructions for more information. 1040es   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. 1040es See below for a discussion of these forms. 1040es Request for prompt assessment (charge) of tax. 1040es   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. 1040es However, as a personal representative, you may request a prompt assessment of tax after the return has been filed. 1040es This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. 1040es This request can be made for any tax return (except the estate tax return) of the decedent or the decedent's estate. 1040es This may permit a quicker settlement of the tax liability of the estate and an earlier final distribution of the assets to the beneficiaries. 1040es Form 4810. 1040es   Form 4810 can be used for making this request. 1040es It must be filed separately from any other document. 1040es   As the personal representative for the decedent's estate, you are responsible for any additional taxes that may be due. 1040es 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. 1040es This applies even though the returns were filed before the decedent's death. 1040es Failure to report income. 1040es   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. 1040es However, such a request may relieve you of personal liability for the tax if you did not have knowledge of the unpaid tax. 1040es Request for discharge from personal liability for tax. 1040es   An executor can make a request for discharge from personal liability for a decedent's income, gift, and estate taxes. 1040es The request must be made after the returns for those taxes are filed. 1040es To make the request, file Form 5495. 1040es For this purpose, an executor is an executor or administrator that is appointed, qualified, and acting within the United States. 1040es   Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. 1040es If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. 1040es 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. 1040es    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. 1040es Insolvent estate. 1040es   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. 1040es 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. 1040es 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. 1040es 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. 1040es 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. 1040es Fees Received by Personal Representatives All personal representatives must include fees paid to them from an estate in their gross income. 1040es 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. 1040es 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. 1040es 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. 1040es 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. 1040es A surviving spouse, under certain circumstances, may have to file the returns for the decedent. 1040es See Joint Return, later. 1040es Return for preceding year. 1040es   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. 1040es The return for that year will be a regular return and the personal representative must file it. 1040es Example. 1040es Samantha Smith died on March 21, 2013, before filing her 2012 tax return. 1040es Her personal representative must file her 2012 return by April 15, 2013. 1040es Her final tax return covering the period from January 1, 2013, to March 20, 2013, is due April 15, 2014. 1040es Name, Address, and Signature Write the word “DECEASED,” the decedent's name, and the date of death across the top of the tax return. 1040es If filing a joint return, write the name and address of the decedent and the surviving spouse in the name and address fields. 1040es 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. 1040es Third party designee. 1040es   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. 1040es 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. 1040es It also allows the designee to perform certain actions. 1040es See the Instructions for Form 1040 for details. 1040es Signature. 1040es   If a personal representative has been appointed, that person must sign the return. 1040es If it is a joint return, the surviving spouse must also sign it. 1040es 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. 1040es ” 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. 1040es ” Paid preparer. 1040es   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. 1040es See the Form 1040 instructions for details. 1040es 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. 1040es 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. 1040es 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. 1040es The tax return must be prepared for the year of death regardless of when during the year death occurred. 1040es Generally, you must file the final income tax return of the decedent with the Internal Revenue Service Center for the place where you live. 1040es A tax return for a decedent can be electronically filed. 1040es A personal representative may also obtain an income tax filing extension on behalf of a decedent. 1040es Filing Requirements The gross income, age, and filing status of a decedent generally determine whether a return must be filed. 1040es 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. 1040es It includes gross receipts from self-employment, but if the business involves manufacturing, merchandising, or mining, subtract any cost of goods sold. 1040es In general, filing status depends on whether the decedent was considered single or married at the time of death. 1040es See the income tax return instructions or Publication 501, Exemptions, Standard Deduction, and Filing Information. 1040es 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. 1040es Also, the decedent may be entitled to other credits that result in a refund. 1040es These advance payments of tax and credits are discussed later under Credits, Other Taxes, and Payments. 1040es Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. 1040es   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. 1040es   If the personal representative is filing a claim for refund on Form 1040X, Amended U. 1040es S. 1040es 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. 1040es Example. 1040es Edward Green died before filing his tax return. 1040es You were appointed the personal representative for Edward's estate, and you file his Form 1040 showing a refund due. 1040es 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. 1040es    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. 1040es 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. 1040es A new check will be issued in your name and mailed to you. 1040es Death certificate. 1040es   When filing the decedent's final income tax return, do not attach the death certificate or other proof of death to the final return. 1040es Instead, keep it for your records and provide it if requested. 1040es Nonresident Alien If the decedent was a nonresident alien who would have had to file Form 1040NR, U. 1040es S. 1040es Nonresident Alien Income Tax Return, you must file that form for the decedent's final tax year. 1040es See the Instructions for Form 1040NR for the filing requirements, due date, and where to file. 1040es Joint Return Generally, the personal representative and the surviving spouse can file a joint return for the decedent and the surviving spouse. 1040es 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. 1040es 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. 1040es 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. 1040es 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. 1040es The filing status of the decedent in this instance is married filing a separate return. 1040es For information about tax benefits to which a surviving spouse may be entitled, see Tax Benefits for Survivors, later, under Other Tax Information. 1040es Personal representative may revoke joint return election. 1040es   A court-appointed personal representative may revoke an election to file a joint return previously made by the surviving spouse alone. 1040es This is done by filing a separate return for the decedent within one year from the due date of the return (including any extensions). 1040es 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. 1040es Relief from joint liability. 1040es   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. 1040es 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. 1040es For information on requesting this relief, see Publication 971, Innocent Spouse Relief. 1040es 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. 1040es The method of accounting regularly used by the decedent before death also determines the income includible on the final return. 1040es This section explains how some types of income are reported on the final return. 1040es For more information about accounting methods, see Publication 538, Accounting Periods and Methods. 1040es 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. 1040es Constructive receipt of income. 1040es   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. 1040es Include the interest income on the final return. 1040es   Generally, a dividend is considered constructively received if it was available for use by the decedent without restriction. 1040es If the corporation customarily mailed its dividend checks, the dividend was includible when received. 1040es 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. 1040es Do not include the dividend in the final return. 1040es Accrual Method Generally, under an accrual method of accounting, income is reported when earned. 1040es If the decedent used an accrual method, only the income items normally accrued before death are included on the final return. 1040es 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. 1040es 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. 1040es You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts. 1040es 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). 1040es 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. 1040es 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. 1040es See U. 1040es S. 1040es 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. 1040es How to report. 1040es   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. 1040es 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. 1040es Then, show any interest (including any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. 1040es Identify the amount of this adjustment as “Nominee Distribution” or other appropriate designation. 1040es   Report dividend income for which you received a Form 1099-DIV, Dividends and Distributions, on the appropriate schedule using the same procedure. 1040es    Note. 1040es 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. 1040es See General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) for more information on filing Forms 1099. 1040es Partnership Income The death of a partner closes the partnership's tax year for that partner. 1040es Generally, it does not close the partnership's tax year for the remaining partners. 1040es 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. 1040es 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. 1040es On the decedent's final return, include the decedent's distributive share of partnership items for the following periods. 1040es The partnership's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). 1040es The period, if any, from the end of the partnership's tax year in (1) to the decedent's date of death. 1040es Example. 1040es Mary Smith was a partner in XYZ partnership and reported her income on a tax year ending December 31. 1040es The partnership uses a tax year ending June 30. 1040es Mary died August 31, 2013, and her estate established its tax year through August 31. 1040es The distributive share of partnership items based on the decedent's partnership interest is reported as follows. 1040es 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). 1040es 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. 1040es 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. 1040es The corporation's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). 1040es The period, if any, from the end of the corporation's tax year in (1) to the decedent's date of death. 1040es Self-Employment Income Include self-employment income actually or constructively received or accrued, depending on the decedent's accounting method. 1040es 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. 1040es For this purpose, the partnership's income or loss is considered to be earned ratably over the partnership's tax year. 1040es 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. 1040es For more information, see Publication 555, Community Property. 1040es 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. 1040es 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. 1040es The estate tax deduction, discussed later, does not apply to this amount. 1040es If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. 1040es For other information on HSAs, Archer MSAs, or Medicare Advantage MSAs, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. 1040es 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. 1040es The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. 1040es 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. 1040es The estate tax deduction, discussed later, does not apply to this amount. 1040es If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. 1040es 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. 1040es 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. 1040es For more information on Coverdell ESAs, see Publication 970, Tax Benefits for Education. 1040es Accelerated Death Benefits Accelerated death benefits are amounts received under a life insurance contract before the death of the insured individual. 1040es These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider. 1040es 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. 1040es For more information, see the discussion under Gifts, Insurance, and Inheritances under Other Tax Information, later. 1040es Exemptions and Deductions Generally, the rules for exemptions and deductions allowed to an individual also apply to the decedent's final income tax return. 1040es Show on the final return deductible items the decedent paid (or accrued, if the decedent reported deductions on an accrual method) before death. 1040es This section contains a detailed discussion of medical expenses because the tax treatment of the decedent's medical expenses can be different. 1040es See Medical Expenses, later. 1040es Exemptions You can claim the decedent's personal exemption on the final income tax return. 1040es 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. 1040es 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. 1040es For information on the appropriate standard deduction, see the Form 1040 income tax return instructions or Publication 501. 1040es 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. 1040es This includes expenses for the decedent, as well as for the decedent's spouse and dependents. 1040es 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. 1040es In that case medical expenses exceeding 7. 1040es 5% of AGI may be deducted. 1040es Qualified medical expenses are not deductible if paid with a tax-free distribution from an HSA or an Archer MSA. 1040es Election for decedent's expenses. 1040es   Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). 1040es 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. 1040es   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). 1040es You can deduct expenses incurred in the year of death on the final income tax return. 1040es 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. 1040es   The amount you can deduct on the income tax return is the amount above 10% of adjusted gross income (or 7. 1040es 5% of adjusted gross income if the decedent or the decedent's spouse was born before January 2, 1949). 1040es Amounts not deductible because of this percentage cannot be claimed on the federal estate tax return. 1040es Making the election. 1040es   You make the election by attaching a statement, in duplicate, to the decedent's income tax return or amended return. 1040es 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. 1040es This election applies only to expenses incurred for the decedent, not to expenses incurred to provide medical care for dependents. 1040es Example. 1040es Richard Brown used the cash method of accounting and filed his income tax return on a calendar year basis. 1040es Richard died on June 1, 2013, at the age of 78, after incurring $800 in medical expenses. 1040es Of that amount, $500 was incurred in 2012 and $300 was incurred in 2013. 1040es Richard itemized his deductions when he filed his 2012 income tax return. 1040es The personal representative of the estate paid the entire $800 liability in August 2013. 1040es The personal representative may file an amended return (Form 1040X) for 2012 claiming the $500 medical expense as a deduction, subject to the 7. 1040es 5% limit. 1040es The $300 of expenses incurred in 2013 can be deducted on the final income tax return if deductions are itemized, subject to the 7. 1040es 5% limit. 1040es 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. 1040es Medical expenses not paid by estate. 1040es   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. 1040es 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. 1040es Insurance reimbursements. 1040es   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. 1040es The reimbursements are also includible in the decedent's gross estate. 1040es No deduction for funeral expenses can be taken on the final Form 1040 of a decedent. 1040es These expenses may be deductible for estate tax purposes on Form 706. 1040es 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. 1040es A net operating loss on the decedent's final income tax return can be carried back to prior years. 1040es (See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. 1040es ) You cannot deduct any unused net operating loss or capital loss on the estate's income tax return. 1040es At-risk loss limits. 1040es   Special at-risk rules apply to most activities that are engaged in as a trade or business or for the production of income. 1040es   These rules limit the deductible loss to the amount which the individual was considered at-risk in the activity. 1040es 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. 1040es 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. 1040es 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. 1040es For more information, see Publication 925, Passive Activity and At-Risk Rules. 1040es Passive activity rules. 1040es   A passive activity is any trade or business activity in which the taxpayer does not materially participate. 1040es To determine material participation, see Publication 925. 1040es Rental activities are passive activities regardless of the taxpayer's participation, unless the taxpayer meets certain eligibility requirements. 1040es   Individuals, estates, and trusts can offset passive activity losses only against passive activity income. 1040es Passive activity losses or credits not allowed in one tax year can be carried forward to the next year. 1040es   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. 1040es 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. 1040es The part of the accumulated losses equal to the excess is not allowed as a deduction for any tax year. 1040es   Use Form 8582, Passive Activity Loss Limitations, to summarize losses and income from passive activities and to figure the amounts allowed. 1040es For more information, see Publication 925. 1040es 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. 1040es Credits On the final income tax return, you can claim any tax credits that applied to the decedent before death. 1040es Some of these credits are discussed next. 1040es Earned income credit. 1040es   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. 1040es If the allowable credit is more than the tax liability for the year, the excess is refunded. 1040es   For more information, see Publication 596, Earned Income Credit (EIC). 1040es Credit for the elderly or the disabled. 1040es   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. 1040es The decedent: Was a “qualified individual,” and Had income (adjusted gross income (AGI) and nontaxable social security and pensions) less than certain limits. 1040es   For details on qualifying for or figuring the credit, see Publication 524, Credit for the Elderly or the Disabled. 1040es Child tax credit. 1040es   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. 1040es 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. 1040es For more information, see the Instructions for Form 1040. 1040es Adoption credit. 1040es   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. 1040es   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. 1040es See Form 8839, Qualified Adoption Expenses, and its instructions for more details. 1040es General business tax credit. 1040es   The general business credit available to a taxpayer is limited. 1040es 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. 1040es Any unused credit arising in a tax year beginning after 1997 has a 1-year carryback and a 20-year carryforward period. 1040es   After the carryforward period, a deduction may be allowed for any unused business credit. 1040es If the taxpayer dies before the end of the carryforward period, the deduction generally is allowed in the year of death. 1040es   For more information on the general business credit, see Publication 334, Tax Guide for Small Business. 1040es 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. 1040es Self-employment tax. 1040es   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. 1040es 28 or more. 1040es Alternative minimum tax (AMT). 1040es   The tax laws give special treatment to certain types of income and allow special deductions and credits for certain types of expenses. 1040es The alternative minimum tax (AMT) was enacted so taxpayers who benefit from these laws still pay at least a minimum amount of tax. 1040es In general, the AMT is the excess of the tentative minimum tax over the regular tax shown on the return. 1040es Form 6251. 1040es    Use Form 6251, Alternative Minimum Tax—Individuals, to determine if this tax applies to the decedent. 1040es See the form instructions for information on when you must attach Form 6251 to Form 1040. 1040es Form 8801. 1040es   If the decedent paid AMT in a previous year or had a credit carryforward, the decedent may be eligible for a minimum tax credit. 1040es See Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts. 1040es 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. 1040es 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. 1040es 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. 1040es For this purpose, a qualified hazardous duty area is treated as a combat zone. 1040es If the tax (including interest, additions to the tax, and additional amounts) for these years has been assessed, the assessment will be forgiven. 1040es If the tax has been collected (regardless of the date of collection), that tax will be credited or refunded. 1040es 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. 1040es If any unpaid tax (including interest, additions to the tax, and additional amounts) has been assessed, this assessment will be forgiven. 1040es Also, if any tax was collected after the date of death, that amount will be credited or refunded. 1040es 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. 1040es This is true even if death actually occurred earlier. 1040es For other tax information for members of the Armed Forces, see Publication 3, Armed Forces' Tax Guide. 1040es 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. 1040es S. 1040es employee, and In a military or terrorist action. 1040es 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. 1040es Example. 1040es The income tax liability of a civilian employee of the United States who died in 2013 because of wounds incurred while a U. 1040es S. 1040es 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. 1040es Refunds are allowed for the tax years for which the period for filing a claim for refund has not ended, as discussed later. 1040es Military or terrorist action defined. 1040es   A military or terrorist action means the following. 1040es Any terrorist activity that most of the evidence indicates was directed against the United States or any of its allies. 1040es Any military action involving the U. 1040es S. 1040es 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. 1040es   Terrorist activity includes criminal offenses intended to coerce, intimidate, or retaliate against the government or civilian population. 1040es Military action does not include training exercises. 1040es Any multinational force in which the United States is participating is treated as an ally of the United States. 1040es Determining if a terrorist activity or military action has occurred. 1040es   You may rely on published guidance from the IRS to determine if a particular event is considered a terrorist activity or military action. 1040es 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. 1040es Under the Act, the federal income tax liability of those killed in the following attacks (specified terrorist victim) is forgiven for certain tax years. 1040es The April 19, 1995, terrorist attack on the Alfred P. 1040es Murrah Federal Building (Oklahoma City). 1040es The September 11, 2001, terrorist attacks. 1040es The terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002. 1040es The Act also exempts from federal income tax the following types of income. 1040es Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack. 1040es Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack. 1040es Certain death benefits paid by an employer to the survivor of an employee because the employee died as a result of a terrorist attack. 1040es Payments from the September 11th Victim Compensation Fund 2001. 1040es The Act also reduces the estate tax of individuals who die as a result of a terrorist attack. 1040es See Publication 3920, Tax Relief for Victims of Terrorist Attacks, for more information. 1040es 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. 1040es The decedent's income tax liability is forgiven for the tax year in which death occurs, and for the tax year prior to death. 1040es For information on death benefit payments and the reduction of federal estate taxes, see Publication 3920. 1040es 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). 1040es For more information on the Act, see Publication 3920. 1040es 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. 1040es If any tax is still due, it will be canceled. 1040es 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. 1040es 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. 1040es Qualified hospitalization means any hospitalization outside the United States and any hospitalization in the United States of not more than 5 years. 1040es 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. 1040es Filing a claim. 1040es   Use the following procedures to file a claim. 1040es If a U. 1040es S. 1040es 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. 1040es Form W-2, Wage and Tax Statement, must accompany all returns. 1040es If a U. 1040es S. 1040es individual income tax return has been filed, you should make a claim for refund by filing Form 1040X. 1040es You must file a separate Form 1040X for each year in question. 1040es   You must file these returns and claims at the following address for regular mail (U. 1040es S. 1040es Postal Service). 1040es    Internal Revenue Service 333 W. 1040es 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. 1040es On the applicable return, write the same phrase on the line for total tax. 1040es 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. 1040es   Include an attachment showing the computation of the decedent's tax liability and a computation of the amount to be forgiven. 1040es On joint returns, make an allocation of the tax as described below under Joint returns. 1040es 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. 1040es   You must attach Form 1310 to all returns and claims for refund. 1040es However, for exceptions to filing Form 1310, see Form 1310. 1040es Statement of Person Claiming Refund Due a Deceased Taxpayer, under Refund, earlier. 1040es   You must also attach proof of death that includes a statement that the individual was a U. 1040es S. 1040es employee on the date of injury and on the date of death and died as the result of a military or terrorist action. 1040es For military and civilian employees of the Department of Defense, attach DD Form 1300, Report of Casualty. 1040es For other U. 1040es S. 1040es civilian employees killed in the United States, attach a death certificate and a certification (letter) from the federal employer. 1040es For other U. 1040es S. 1040es civilian employees killed overseas, attach a certification from the Department of State. 1040es   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. 1040es 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. 1040es Joint returns. 1040es   If a joint return was filed, only the decedent's part of the income tax liability is eligible for forgiveness. 1040es Determine the decedent's tax liability as follows. 1040es Figure the income tax for which the decedent would have been liable if a separate return had been filed. 1040es Figure the income tax for which the spouse would have been liable if a separate return had been filed. 1040es Multiply the joint tax liability by a fraction. 1040es The numerator of the fraction is the amount in (1), above. 1040es The denominator of the fraction is the total of (1) and (2). 1040es   The resulting amount from (3) above is the decedent's tax liability eligible for forgiveness. 1040es Filing Reminders To minimize the time needed to process the decedent's final return and issue any refund, be sure to follow these procedures. 1040es Write “DECEASED,” the decedent's name, and the date of death across the top of the tax return. 1040es If a personal representative has been appointed, the personal representative must sign the return. 1040es If it is a joint return, the surviving spouse must also sign it. 1040es 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. 1040es 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. 1040es ” To claim a refund for the decedent, do the following. 1040es If you are the decedent's spouse filing a joint return with the decedent, file only the tax return to claim the refund. 1040es 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. 1040es (A power of attorney or a copy of the decedent's will is not acceptable evidence of your appointment as the personal representative. 1040es ) 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). 1040es 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. 1040es 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. 1040es Tax Benefits for Survivors Survivors can qualify for certain benefits when filing their own income tax returns. 1040es Joint return by surviving spouse. 1040es   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. 1040es Decedent as your dependent. 1040es   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. 1040es   If the decedent was your qualifying child, you may be able to claim the child tax credit or the earned income credit. 1040es 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. 1040es 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. 1040es Qualifying widows and widowers. 1040es   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. 1040es Requirements. 1040es   Generally, you qualify for this special benefit if you meet all of the following requirements. 1040es You were entitled to file a joint return with your spouse for the year of death—whether or not you actually filed jointly. 1040es You did not remarry before the end of the current tax year. 1040es You have a child, stepchild, or foster child who qualifies as your dependent for the tax year. 1040es 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. 1040es Example. 1040es William Burns' wife died in 2010. 1040es William has not remarried and continued throughout 2011 and 2012 to maintain a home for himself and his dependent child. 1040es For 2010, he was entitled to file a joint return for himself and his deceased wife. 1040es For 2011 and 2012, he qualifies to file as a qualifying widower with dependent child. 1040es For later years, he may qualify to file as a head of household. 1040es Figuring your tax. 1040es   Check the box on line 5 (Form 1040 or 1040A) under Filing Status on your tax return. 1040es Use the Tax Rate Schedule or the column in the Tax Table for Married filing jointly, which gives you the split-income benefits. 1040es   The last year you can file jointly with, or claim an exemption for, your deceased spouse is the year of death. 1040es Joint return filing rules. 1040es   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. 1040es See Joint Return under Final Income Tax Return for Decedent—Form 1040, earlier. 1040es 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. 1040es 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. 1040es This exclusion does not apply to certain income. 1040es For more information, see Publication 3920. 1040es How To Report Income in respect of a decedent must be included in the income of one of the following. 1040es The decedent's estate, if the estate receives it. 1040es The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it. 1040es Any person to whom the estate properly distributes the right to receive it. 1040es 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. 1040es See Estate Tax Deduction, later. 1040es Example 1. 1040es Frank Johnson owned and operated an apple orchard. 1040es He used the cash method of accounting. 1040es He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. 1040es The proceeds from the sale are income in respect of a decedent. 1040es When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. 1040es When Frank's widow collects the $2,000, she must include that amount in her return. 1040es It is not reported on the final return of the decedent or on the return of the estate. 1040es Example 2. 1040es Assume the same facts as in Example 1, except that Frank used the accrual method of accounting. 1040es The amount accrued from the sale of the apples would be included on his final return. 1040es Neither the estate nor the widow would realize income in respect of a decedent when the money is later paid. 1040es Example 3. 1040es On February 1, George High, a cash method taxpayer, sold his tractor for $3,000, payable March 1 of the same year. 1040es His adjusted basis in the tractor was $2,000. 1040es George died on February 15, before receiving payment. 1040es 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. 1040es In other words, the income in respect of a decedent is the gain the decedent would have realized had he lived. 1040es Example 4. 1040es Cathy O'Neil was entitled to a large salary payment at the date of her death. 1040es The amount was to be paid in five annual installments. 1040es The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. 1040es The payments are income in respect of a decedent. 1040es None of the payments were includible on Cathy's final return. 1040es 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. 1040es Example 5. 1040es You inherited the right to receive renewal commissions on life insurance sold by your father before his death. 1040es You inherited the right from your mother, who acquired it by bequest from your father. 1040es Your mother died before she received all the commissions she had the right to receive, so you received the rest. 1040es The commissions are income in respect of a decedent. 1040es None of these commissions were includible in your father's final return. 1040es The commissions received by your mother were included in her income. 1040es The commissions you received are not includible in your mother's income, even on her final return. 1040es You must include them in your income. 1040es Character of income. 1040es   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. 1040es If the income would have been a capital gain to the decedent, it will be a capital gain to you. 1040es Transfer of right to income. 1040es   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. 1040es   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. 1040es   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. 1040es See Installment obligations, later. 1040es Transfer defined. 1040es   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. 1040es Installment obligations. 1040es   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. 1040es Include in your income the same profit the decedent would have included had death not occurred. 1040es For more information, see Publication 537, Installment Sales. 1040es   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. 1040es Transfer to obligor. 1040es   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). 1040es A transfer also occurs if the obligation was canceled either at death or by the estate or person receiving the obligation from the decedent. 1040es An obligation that becomes unenforceable is treated as having been canceled. 1040es   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. 1040es 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. 1040es   If the decedent and obligor were related persons, the fair market value of the obligation cannot be less than its face value. 1040es 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. 1040es Wages. 1040es   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. 1040es The income is not reduced by any amounts withheld by the employer. 1040es 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. 1040es   Wages paid as income in respect of a decedent are not subject to federal income tax withholding. 1040es However, if paid during the calendar year of death, they are subject to withholding for social security and Medicare taxes. 1040es These taxes should be included on the decedent's Form W-2 along with the taxes withheld before death. 1040es These wages are not included in box 1 of Form W-2. 1040es   Wages paid as income in respect of a decedent after the year of death generally are not subject to withholding for any federal taxe