Death – “Don’t be afraid of death; be afraid of an unlived life.” After all, nothing is certain except for death, taxes and the occasional paycheck for graphic design jobs indianapolis. But that paycheck isn’t always a welcome sight. The IRS has rules about what to do with your final pay before it’s spent in a careless splurge on anything but necessities. This post will guide you through these rules and give you tips on how to make sure you deduct as much as possible before the grand finale.
1. Death From a Taxing Perspective
The guidelines for how to handle the death of a taxpayer are in Section 103(h) of the IRS Revenue Procedure 2013-19, which was published in the Jan. 30, 2013 edition of Internal Revenue Bulletin (IRB) 2013-3. In short, funeral expenses and administration costs must be paid when it’s known that the taxpayer is gone. If a taxpayer dies before his or her estate is settled or he or she files an estate tax return and qualifies for the applicable exclusion amount, then funeral expenses must be paid when it’s known that he has died. Under the current exclusion amount, this is $5.34 million for 2016. This exclusion amount will also increase over time.
The instructions for Federal Form 706 and the instructions for Form 706-NA (the Estate Tax Return) walk you through the process of how to handle deductions on a personal return or an estate tax return, respectively. As you’re figuring out your deductions, keep in mind that you can only deduct funeral expenses if they’re not lavish or extreme. Here’s what the IRS says about it:
2. Expenses That Must Be Paid
Taxpayers may deduct certain personal expenses (e.g., funeral expenses and administration costs) paid before the taxpayer died, or within a reasonable time if the taxpayer was not considered to have died. This doesn’t apply to direct burial costs and does not apply to prepaid debts for funeral, burial or cremation services. If you want to claim a deduction for such expenses on either your personal or estate tax return, the deduction may be claimed only until the date of payment or reasonable time if no payment is received by that date. Reasonable time is defined as 180 days after death in most cases. Generally, there are also rules that must be followed when it’s known that an individual has passed away.
What qualifies as reasonable or extreme? The IRS only says that expenses that are reasonable and necessary in the circumstances may be deducted. For instance, it’s reasonable to pay for a $5,000 headstone if you’ve paid off the mortgage on your house in full before you died. It’s also reasonable to have a small burial plot at a local cemetery after the whole estate is settled, so your wife can be buried next to you with no mark on society because of her husband’s indiscretions. But paying for a yacht in the Cayman Islands is not considered reasonable by most people.
The IRS also mentions that you can only deduct your funeral and administrative expenses until the date of payment or “reasonable time” if no payment is received by that date. Reasonable time is 180 days after death in most cases. The rules are slightly different for estates involved in probate; for example, estates that go through the court process, because the executor has six months to make payments from the date of death. However, any unpaid bills at the end of this period must be paid from other assets in the estate.
3. Payroll Deductions
As far as employer deductions, you might have an easier time getting these taken care of before you die than you might think. Here’s how it works under the current rules:
Payroll Tax: Employers are not required to pay federal or state payroll taxes when they pay their employees. However, they must still report these taxes and all deductions on Form W-2. You’ll need to provide your employer with proof of this information, which is not difficult if you have a copy of your final W-2 form.
Medicare Tax: If you’re 65 or older and filing as single, you only need to report any Social Security taxes withheld by your employer on your Form 1040.
Social Security Tax: If you’re not 65 or older and filing as single, your employer must withhold the 6.2% Social Security tax from your wages. However, if you have any income that is subject to federal income tax withholding, your employer must withhold 1.45% of that income for Medicare taxes.
4. Final Word
Not paying attention to details can end up costing you plenty after you’re gone in the first few weeks or months following death. The IRS has a lot of rules and regulations on how to handle the death of a taxpayer. But if you can act before it’s too late, you might be able to save some money on taxes and get yourself out of debt before the end comes.