Death and Taxes: Lessons Learned
Death and Taxes are the two things no one can avoid. While taxes is something we face every year, the death of a parent is something we face only once or twice, depending on our family situation. As I found out with the 2016 death of my mother, our knowledge of how to handle taxes after the death of a parent or other close loved one is very limited.
Despite all the information out there online on both subjects individually, I found it all extremely confusing as I tried to navigate that complexity of what happens with your taxes when someone close to you dies. Tax law is very complicated and tax guidance is even more complicated. No one wants the liability of telling you anything just in case what they tell you does not apply to you. In most cases, people want you to spend massive amounts of money consulting with attorneys and tax professionals instead of giving you the most basic advice. It’s akin to a nurse not telling me to run cold water on a burn and sending me to the hospital (at a delay of hours) when my hair caught fire blowing out candles when I was in university. The burn gets worse by not taking immediate action.
The following is what I learned filing my 2016 taxes. My situation may be different from yours. You may have a more complicated tax situation than I did. What follows is some simple advice from my tax filing as equal beneficiary to my brother who was the executor on her estate.
Taxes to be paid:
The executor of the state must file Federal and State income taxes for the deceased. If the deceased has no tax liability, that is fine. But the returns must be filed on behalf of the deceased.
If deceased owns her home at time of death and it is to be sold, sell the home as quickly as possible to reduce tax liability and simplify your tax situation. Same for any other property that is usually taxed upon sale. If you are not keeping the property for the long term, you make your life easier by selling it as soon as possible.
If you inherit any annuities or retirement funds, those funds are taxable by the Federal government if they were tax-deferred plans such as 401K, traditional IRA, etc. Pre-pay that tax before you receive any funds if at all possible. It may not always be possible to pre-pay the taxes so ask the financial institutions involved about it.
The more you pre-pay taxes, the easier filing your return becomes. In this it is no different than when you choose fewer tax deductions as you are working and thus have more taxes taken out of each check as you earn. When the tax season hits, a refund is easier to handle than a big tax bill. Err on the side of caution and pay as much tax as you can before you receive funds from the estate so you don’t over spend and find yourself unable to pay those taxes when the bill arrives.
Now here is the good news: what is NOT taxable:
Cash, savings, checking, and certificate of deposit funds. That is because the deceased already paid income taxes on those funds. You do not report these funds to the IRS. It’s your money.
Proceeds from the sale of a home if the executor has paid all applicable taxes up front. In the common case of a home being sold and its funds being dispersed to multiple beneficiaries, those beneficiaries do not pay taxes on it nor do they claim those funds as income because all taxes have already been paid. For example: a home sells for $100,000. After taxes, attorney fees, and other closing costs the net sale is $80,000. The Will specifies two beneficiaries which then each receive $40,000. The $40,000 received is not taxable because it’s the net after taxes are paid. The beneficiary does not pay tax on the $40,000; the money stays off the tax return.
My mother and me during a 2001 visit as part of the studio audience for Good Morning America. This is us with anchor Charles Gibson, one of my mother’s favourite celebrities.
Now of course I’m not a lawyer. I am not a tax professional. I’m a historian and an author from a humble background. My mother was not a rich, glamourous person. She was a teacher before I was born and a factory worker and retail clerk for most of her working life after I was born. She was very average, living paycheck to paycheck and doing creative things to keep us fed and with some sort of roof over our heads. So her estate was not massive and there were no capital gains taxes that I needed to concern myself with.
Maybe this blog post is useless. But maybe it helps you too. I stressed out for MONTHS over the tax consequences of my mother’s death. I smartly put 30% of my inheritance into a high yield savings account (I switched to Ally Bank to maximize those earnings) in part because I was terrified that I was going to have to pay nearly everything I inherited back to the government. I did not. A tax professional explained to me what I just posted and set my mind at ease. I hope this post does the same for you.
Rest in peace mom. May you find joy in your new incarnation and the love you never found in this life.