Have a question about saving for retirement or your personal financial situation? Whatever the question, Barron’s Retirement can try to help. Email [email protected], and we might look to financial pros for answers.
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Q: My mom died last June. Do I need to file taxes for her?
Yes, you must file taxes for her using the standard IRS Form 1040 individual income tax return, and there are two additional forms you should be aware of, according to the California Society of Certified Public Accountants.
If there’s no surviving spouse and you’re the executor of her will, you should fill out Form 56 to inform the Internal Revenue Service that you’re accepting fiduciary responsibility for her tax matters. If she’s owed a return, then you’ll also want to fill out Form 1310 to claim it, according to the California Society of CPAs.
Bret Scholl of the accounting and business-consulting firm Scholl & Co. said forgetting to submit Form 56 is a common mistake in this situation. “They need to file that form so they’ll be notified if the IRS has any issues or questions,” Scholl said. “Of course, if there’s never any issue or problem, it’s kind of a nonevent, even though they should have filed it.”
Other IRS forms and information you may need to file for a deceased loved one include:• W-2s and 1099s that report income or expenses paid before the person died• A death certificate may be necessary depending on the state and, in some cases, for the federal return.• Form 1041 to report more than $600 in annual gross income received after the person died, such as dividends, interest, and proceeds from the sale of assets.
If you can’t gather all the paperwork in time, file for an extension, Scholl says. And if you need more information, check out IRS Publication 559, “Survivors, Executors and Administrators.”
Scholl says if the deceased person had a history of failing to file tax returns or owing money to the IRS, the executor should request copies of recent tax transcripts from the IRS and the state tax agency “just to make sure that everything’s cleared.”
“It’s very well advised that they take that step,” he said. “That can take some time, but it’s well worth doing because it also helps to protect their own personal liability.”
Q: What’s the difference between a tax credit and a tax deduction?
Tax deductions and tax credits both decrease your tax burden, but tax credits generally are more advantageous to taxpayers because they directly reduce the amount of tax they owe, according to the California Society of Certified Public Accountants.
Tax credits reduce your total tax liability for the year on a dollar-for-dollar basis, so a $1,000 tax credit lowers your tax bill by $1,000.
Tax credits are either refundable or nonrefundable. If you qualify for a refundable credit and that amount is larger than your tax bill, you’ll get a refund for the difference. For example, if you owe $500 in taxes and qualify for a $1,000 refundable tax credit, you will get a check for $500. If the credit is partially refundable, you’ll get a refund for a percentage of the difference.
Conversely, with nonrefundable tax credits, you won’t get a tax refund if that credit is worth more than you owe in taxes.
Tax deductions, on the other hand, lower the amount of your income that’s subject to taxes. If you fall into the 22% federal income tax bracket, for example, a $1,000 deduction will save you $220.
“From a policy perspective, people should understand that deductions like the mortgage interest deduction and charitable contributions are worth more to people in higher income tax brackets,” says Dr. Annette Nellen, a professor in charge of San José State University’s graduate tax program. “If two people each donate $1,000 to charity, the one in the higher tax bracket will benefit more.”
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The Little Q: Your Finance Questions, Answered
