Losing someone close to you is never easy. The grief comes in waves, often when you least expect it. And just when you're trying to navigate those emotions, you're handed a pile of paperwork and deadlines—many of them involving taxes. Few people are prepared for that moment, yet it’s one most families will eventually face. Knowing what to expect can make this difficult chapter a little less overwhelming.
Who Takes Care of the Tax Matters?
After a death, someone has to step in and manage the person’s financial and legal affairs. This person is usually named in the will as the executor or personal representative. If no one is named, or if there’s no will at all, the court appoints someone to handle the estate.
If that person’s you, it’s understandable to feel unsure at first. What you’re doing, essentially, is wrapping up a financial life—filing one last tax return for the individual, paying off remaining debts, and making sure what’s left is handled responsibly. The IRS, and often the state, will expect that certain forms and deadlines be met. You don’t need to know everything from the start, but it helps to understand the general path forward.
Filing the Final Tax Return
Even after someone has passed, the government still expects a tax return to cover the portion of the year they were alive. This final personal income tax return, usually a Form 1040, covers January 1 up to the date of death. If they had income during that time—whether from a job, Social Security, or investment accounts—it gets reported just like it would in any other year.
If the person was married, the surviving spouse may be able to file jointly that year. Otherwise, the executor files the return on behalf of the estate. Be sure to indicate on the return that it’s the final one. In most cases, a copy of the death certificate will be attached.
Other Returns You May Need to File
Depending on the estate, you might also need to file additional forms. For example, if the estate earns money after the person has died—say from a rental property, savings account, or investment—you’ll likely need to file a separate estate income tax return. This is known as Form 1041.
In addition, some states have their own requirements. There might be a state income tax return to file, and in a few states, estate or inheritance taxes may apply. The rules vary widely depending on where the person lived or held property. If you're not sure where to start, this is a good time to ask a CPA for help.
Will the Estate Owe Estate Tax?
Most families won’t owe federal estate tax. For 2024, the federal exemption is over \$13 million per person. That means if the total value of the estate is less than that, there’s no federal estate tax due.
However, about a dozen states have their own estate or inheritance taxes, and their exemption levels are often much lower. Even if the estate doesn’t owe anything to the IRS, you might still need to file a state estate return or pay tax on certain inherited assets. It's one of the many reasons why careful planning—and accurate records—matter during this process.
Watch Out for Taxable Inheritances
Not everything you inherit is tax-free. Some types of income, especially from retirement accounts like traditional IRAs or 401(k)s, may be taxable when you withdraw them. The tax treatment depends on who the beneficiary is and what kind of account it was.
Spouses generally have more options when it comes to inherited retirement accounts. They may be able to roll the funds into their own IRA. Non-spouse beneficiaries, however, may have to follow a specific timeline for withdrawing the money—and those withdrawals are usually taxed as income.
What’s a Step-Up in Basis—and Why It Matters
One key tax benefit to understand when someone passes away is the step-up in basis. When you inherit property—like a home or stocks—the cost basis usually resets to the fair market value as of the date of death. That means if the asset appreciated significantly while the person owned it, you may owe far less in capital gains taxes when you sell it.
Let’s say your parent bought a house for $120,000 decades ago, and it’s now worth $350,000. Instead of being taxed on the full gain if you sell it, your basis “steps up” to the current value. That can be a big advantage—and a good reason not to rush into selling inherited property without first speaking with a tax advisor or real estate professional.
Keep Good Records of Estate Expenses
While you're settling the estate, you may find yourself handling repairs, paying outstanding bills, or covering attorney and CPA fees. These costs can often be deducted from the estate’s income tax return—if you document them properly.
It’s easy for expenses to blend together during this time. That’s why it's important to keep everything organized. Set up a separate bank account for the estate if needed, and keep clear records of every transaction. Save receipts, copies of invoices, and proof of payment. Having everything in order will make it much easier to prepare any tax returns and protect yourself from personal liability.
Give Yourself Time—And Ask for Help
Tax deadlines don’t stop for grief. Unfortunately, many of the responsibilities that follow a death are time-sensitive. Returns are still due. Interest and penalties still accrue. But that doesn’t mean you need to shoulder everything alone.
Accountants, estate attorneys, and financial advisors are used to walking families through this process. Even if you don’t have a large estate to manage, reaching out for professional guidance can help you avoid mistakes that might delay probate, cause tax issues, or create conflict among heirs.
You don’t have to become an expert overnight. You just need someone to help you navigate the steps one at a time.
Don’t Rush Big Financial Decisions
In the weeks and months after a loved one dies, there’s often pressure to move quickly—whether it’s selling a home, closing accounts, or distributing money. But unless there’s an urgent reason, most decisions can wait. In fact, pausing before making major financial moves often leads to better outcomes.
If you’re inheriting money or property, talk with a CPA before making withdrawals or selling assets. There may be tax implications you haven’t considered. With the right timing, you might save yourself or the estate a significant amount.
Handling taxes after a death is never easy—but it doesn’t have to be confusing. With good records, clear communication, and the right guidance, you can move through the process one task at a time. While grief can’t be rushed, taking care of these details is a way of honoring someone’s life—by making sure what they built is handled with care.
by Kate Supino