How to Divide Income and Deductions between the Decedent and the Estate
An administrator or executor of an estate must determine how to divide income and deductions between the decedent’s final Form 1040 and the estate’s Form 1041. Generally, only items received or paid by the decedent as of their date of death should be reported on Form 1040. Jointly owned property (and its income/debts) usually becomes the responsibility of the surviving owner(s) or heir(s). Medical expenses are only deductible on Form 1040.
Just because payments continue to be made to the decedent doesn’t necessarily mean that they should be reported on Form 1040. The estate’s administrator makes the final determination of where these items rightfully belong, and has the responsibility of reporting them correctly.
Most taxpayers are cash basis; they report only items that they’ve actually received or paid out, not items that they owe or others owe to them. This makes it easier to determine which tax return an item belongs on.
If a check is dated after the date of death, it belongs to the estate. Checks dated up through the date of death belong to the decedent, even if the decedent hadn’t yet cashed them. The same is true for amounts owed by the decedent. If the decedent wrote and mailed the check, he or she gets the deduction. If you pay the bill after death, it’s the estate’s deduction.
There are exceptions. Property owned jointly with rights of survivorship (where the title passes automatically to the surviving joint owner(s)), and property owned as tenants by the entireties (where the title passes automatically to the surviving spouse on the first spouse’s death) transfer at the time of death to the surviving owner(s). Any income received after death belongs to the survivor(s), as does responsibility for any mortgage payments owed.
If property is owned jointly as tenants in common, the heirs of the deceased, joint owner become additional joint owners of the property and are now automatically entitled to the decedent’s share of the income (and the decedent’s share of the debts owed on that property).
The estate often receives checks still payable to the decedent personally for months after the decedent’s death. Don’t hesitate to deposit these checks into the estate’s accounts. You must notify the IRS, however, that the estate is going to declare this income. File a nominee Form 1099 with the IRS, showing the decedent (with his or her Social Security Number) as the Payer, and the estate (with its TIN) as the Recipient.
If you’ve failed to file nominee 1099s, place a notation on the estate’s tax return showing that the estate received the income in the name and Social Security Number of the decedent. If you use this method, you should also file a dummy Form 1040 for the decedent, showing the receipt of the income, and then offsetting payments to the estate, making sure to include the estate’s TIN.
You may only deduct medical expenses on Form 1040, and not on Form 1041. If, in the course of administering the estate, you pay final medical bills for the decedent, you don’t need to lose those deductions. The IRS allows even cash-basis taxpayers to deduct medical expenses paid within a year after death on the decedent’s final Form 1040.