US Internal Revenue Service: p559--1997

8/14/2019 US Internal Revenue Service: p559--1997

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ContentsImportant Changes ............................ 1

Important Reminder ........................... 2

Introduction ........................................ 2

Personal Representatives ................. 2Duties .............................................. 2Fees Received by Personal

Representatives ....................... 3

Final Return for Decedent ................. 3Filing Requirements ........................ 3Income To Include .......................... 4Exemptions and Deductions ........... 5Credits, Other Taxes, and

Payments ................................. 6Name, Address, and Signature ...... 6When and Where To File ............... 6Tax Forgiveness for Deaths Due to

Military or Terrorist Actions ...... 6Filing Reminders ............................. 7

Other Tax Information ....................... 7Tax Benefits for Survivors .............. 7Income in Respect of the Decedent 8

Deductions in Respect of theDecedent .................................. 10

Gifts, Insurance, and Inheritances .. 10Other Items of Income .................... 12

Income Tax Return of anEstateForm 1041 ....................... 13

Filing Requirements ........................ 13Income To Include .......................... 14Exemption and Deductions ............. 15Credits, Tax, and Payments ........... 17Name, Address, and Signature ...... 17When and Where To File ............... 17

Distributions to Beneficiaries Froman Estate ...................................... 17

Income That Must Be DistributedCurrently .................................. 18Other Amounts Distributed ............. 18Discharge of a Legal Obligation ..... 18Character of Distributions ............... 18How and When To Report .............. 19Special Rules for Distributions ....... 19

Termination of Estate ..................... 20

Form 706 ............................................. 21

Comprehensive Example .................. 21

Final Return for Decedent ................. 22

Income Tax Return of anEstateForm 1041 ....................... 22

How To Get More Information .......... 23

Checklist of Forms and Due Dates .. 37

Worksheet To Reconcile AmountsReported ....................................... 38

Index .................................................... 39

Important ChangesMedical savings accounts (MSAs). Begin-ning in 1997, certain individuals are eligibleto participate in medical savings accounts

Departmentof theTreasury

InternalRevenueService

Publica tion 559Cat. No. 15107U

Survivors,Executors, andAdministrators

For use in preparing

1997 Returns

Get f orms and other informat ion faster and easier by:COMPUTER

World Wide Web www.irs.ustreas.gov FTP ftp.irs.ustreas.gov IRIS at FedWorld (703) 321-8020

FAX From your FAX machine, dial (703) 368-9694See How To Get More Information in this publication.


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(MSAs). For information on MSAs, see Pub-lication 969, Medical Savings Accounts(MSAs).

The treatment of the MSA at the death ofthe account holder depends on who acquiresthe interest in the account. If the decedent'sspouse is the designated beneficiary of theaccount, the account becomes the spouse'sMSA. If another beneficiary (including aspouse that is not the designated beneficiary)acquires the interest, that person generallymust include in gross income the fair marketvalue of the assets in the account. If the de-cedent's estate acquires the interest, the fairmarket value of the assets in the account isincluded on the final income tax return of thedecedent.

Accelerated death benefits. Beginning in1997, certain payments received under a lifeinsurance contract on the life of a terminallyor chronically ill individual before the individ-ual's death (an accelerated death benefit) canbe excluded from income. For more infor-mation, see the discussion under Income toInclude, under Final Return for Decedent,later.

Consistent treatment of estate and trustitems. Beneficiaries must generally treat es-tate items the same way on their individualreturns as they are treated on the estate'sreturn. This rule applies to returns filed afterAugust 5, 1997.

Estimated tax. Beginning in 1998, the esti-mated tax penalty will not apply unless theamount owed is $1,000 or more (up from$500). For more information, see Estimatedtaxlater.

65day rule for estates. For tax years be-ginning after August 5, 1997, the personalrepresentative can elect to treat distributions

paid or credited by the estate within 65 daysafter the close of the estate's tax year ashaving been paid or credited on the last dayof that tax year.

Distributable net income. For purposes ofdetermining distributable net income of theestate, the separate shares rule may apply ifthere is more than one beneficiary. This ruleapplies to estates of decedents dying afterAugust 5, 1997. For more information, seeDistributions Deduction, later.

Estates and beneficiaries treated as re-lated persons for disallowance of certainitems. For tax years beginning after August

5, 1997, an estate and a beneficiary of thatestate are treated as related persons. Vari-ous tax provisions are affected by thischange, including the one that denies a de-duction for a loss on the sale of an asset be-tween the parties.

The change does not apply to a sale orexchange made to satisfy a pecuniary be-quest.

Survivor benefits of public safety officers.Generally, a survivor annuity paid to thespouse, former spouse, or child of a publicsafety officer killed in the line of duty is ex-cluded from the recipient's gross income. Thisapplies to officers dying after 1996.

Important Reminder

Individual taxpayer identification number(ITIN). The IRS will issue an ITIN to a non-resident or resident alien who does not haveand is not eligible to get a social securitynumber (SSN). To apply for an ITIN, file FormW-7 with the IRS. It usually takes 30 days toget it.

An ITIN is for tax use only. It does notentitle the holder to social security benefitsor change the holder's employment or immi-gration status under U.S. law.

IntroductionThis publication is designed to help those incharge of the property (estate) of an individualwho has died. It shows them how to completeand file federal income tax returns and pointsout their responsibility to pay any taxes due.

A comprehensive example, using taxforms, is included near the end of this publi-cation. Also included at the end of this publi-cation are:

1) A checklist of the forms you may needand their due dates, and

2) A worksheet to reconcile amounts re-ported in the decedent's name on infor-mation Forms W2, 1099INT,1099DIV, etc. The worksheet will helpyou correctly determine the income toreport on the decedent's final return andon the returns for either the estate or abeneficiary.

Useful ItemsYou may want to see:

Publication

950 Introduction to Estate and GiftTaxes

Form (and Instructions)

1040 U.S. Individual Income Tax Return

1041 U.S. Income Tax Return for Es-tates and Trusts

706 United States Estate (andGeneration-Skipping Transfer)Tax Return

See How To Get More Information, nearthe end of this publication for informationabout getting these publications and forms.

PersonalRepresentativesA personal representative of an estate is

an executor, administrator, or anyone who isin charge of the decedent's property. Gener-ally, an executor (or executrix) is named ina decedent's will to administer the estate anddistribute properties as the decedent has di-rected. An administrator (or administratrix)is usually appointed by the court if no willexists, if no executor was named in the will,or if the named executor cannot or will notserve.

In general, an executor and an adminis-trator perform the same duties and have thesame responsibilities.

For estate tax purposes, if there is no ex-ecutor or administrator appointed, qualified,and acting within the United States, the termexecutor includes anyone in actual or con-structive possession of any property of thedecedent. It includes, among others, the de-cedent's agents and representatives; safe-deposit companies, warehouse companies,and other custodians of property in thiscountry; brokers holding securities of the de-cedent as collateral; and the debtors of thedecedent who are in this country.

Because a personal representative for adecedent's estate can be an executor, ad-ministrator, or anyone in charge of the dece-dent's property, the term personal represen-tative will be used throughout thispublication.

DutiesThe primary duties of a personal represen-tative are to collect all the decedent's assets,pay the creditors, and distribute the remainingassets to the heirs or other beneficiaries.

The personal representative also must:

1) File any income tax return and the estatetax return when due, and

2) Pay the tax determined up to the dateof discharge from duties.

Other duties of the personal representative infederal tax matters are discussed in othersections of this publication. If any beneficiaryis a nonresident alien, get Publication 515,Withholding of Tax on Nonresident Aliens andForeign Corporations, for information on thepersonal representative's duties as a with-holding agent.

Penalty. There is a penalty for failure tofile a tax return when due unless the failureis due to reasonable cause. Relying on anagent (attorney, accountant, etc.) is not rea-

sonable cause for late filing. It is the personalrepresentative's duty to file the returns for thedecedent and the estate when due.

Identification number. The first action youshould take if you are the personal represen-tative for the decedent is to apply for an em-ployer identification number for the estate.You should apply for this number as soon aspossible because you need to enter it on re-turns, statements, and other documents thatyou file concerning the estate. You must alsogive the number to payers of interest anddividends and other payers who must file areturn concerning the estate. You must applyfor the number on Form SS4, Application forEmployer Identification Number, availablefrom IRS and Social Security Administrationoffices.

Payers of interest and dividends reportamounts on Forms 1099 using the identifica-tion number of the person to whom the ac-count is payable. After a decedent's death,the Forms 1099 must reflect the identificationnumber of the estate or beneficiary to whomthe amounts are payable. As the personalrepresentative handling the estate you mustfurnish this identification number to the payer.For example, if interest is payable to the es-tate, the estate's identification number mustbe provided to the payer and used to reportthe interest on Form 1099INT, Interest In-come. If the interest is payable to a surviving

joint owner, the survivor's identification num-

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ber must be provided to the payer and usedto report the interest.

The deceased individual's identifyingnumber must not be used to file an individualtax return after the decedent's final tax return.It also must not be used to make estimatedtax payments for a tax year after the year ofdeath.

Penalty. If you do not include the em-ployer identification number on any return,statement, or other document, you are liablefor a penalty for each failure, unless you canshow reasonable cause. You are also liablefor a penalty if you do not give the employeridentification number to another person, or ifyou do not include the taxpayer identificationnumber of another person on a return, state-ment, or other document.

Notice of fiduciary relationship. The termfiduciary means any person acting for an-other person. It applies to persons who havepositions of trust on behalf of others. A per-sonal representative for a decedent's estateis a fiduciary.

If you are appointed to act in any fiduciarycapacity for another, you must file a writtennotice with the IRS stating this. Form 56,Notice Concerning Fiduciary Relationship,

can be used for this purpose. The instructionsand other requirements are given on the backof the form.

Filing the notice. File the written notice(or Form 56) with the IRS service centerwhere the returns are filed for the person (orestate) for whom you are acting. You shouldfile this notice as soon as all of the necessaryinformation (including the employer identifi-cation number) is available. It notifies the IRSthat, as the fiduciary, you are assuming thepowers, rights, duties, and privileges of thedecedent, and allows the IRS to mail to youall tax notices concerning the person (or es-tate) you represent. The notice remains ineffect until you notify the appropriate IRS of-fice that your relationship to the estate hasterminated.

Termination notice. When you are re-lieved of your responsibilities as personalrepresentative, you must advise the IRS officewhere you filed the written notice (or Form56) either that the estate has been terminatedor that your successor has been appointed.If the estate is terminated, you must furnishsatisfactory evidence of the termination of theestate. Use Form 56 for the termination noticeby completing the appropriate part on theform and attaching the required evidence. Ifanother has been appointed to succeed youas the personal representative, you shouldgive the name and address of yoursuccessor.

Request for prompt assessment (charge)of tax. The IRS ordinarily has 3 years fromthe date an income tax return is filed, or itsdue date, whichever is later, to charge anyadditional tax that is due. However, as a per-sonal representative you may request aprompt assessment of tax after the return hasbeen filed. This reduces the time for makingthe assessment to 18 months from the datethe written request for prompt assessmentwas received. This request can be made forany income tax return of the decedent and forthe income tax return of the decedent's es-tate. This may permit a quicker settlement ofthe tax liability of the estate and an earlierfinal distribution of the assets to the benefi-ciaries.

Form 4810. Form 4810, Request forPrompt Assessment Under Internal RevenueCode Section 6501(d), can be used for mak-ing this request. It must be filed separatelyfrom any other document. The request shouldbe filed with the IRS office where the returnwas filed. If Form 4810 is not used, you mustclearly indicate that it is a request for promptassessment under section 6501(d) of theInternal Revenue Code.

As the personal representative for the de-cedent's estate, you are responsible for anyadditional taxes that may be due. You canrequest prompt assessment of any taxes(other than federal estate taxes) for any openyears for the decedent, even though the re-turns were filed before the decedent's death.

Failure to report income. If you or thedecedent failed to report substantial amountsof gross income (more than 25% of the grossincome reported on the return) or filed a falseor fraudulent return, your request for promptassessment will not shorten the period duringwhich the IRS may assess the additional tax.However, such a request may relieve you ofpersonal liability for the tax if you did not haveknowledge of the unpaid tax.

Request for discharge from personal li-

ability for tax. An executor can make awritten request for a discharge from personalliability for a decedent's income and gift taxes.The request must be made after the returnsfor those taxes are filed. For this purpose anexecutor is an executor or administrator thatis appointed, qualified, and acting within theUnited States.

Within 9 months after receipt of the re-quest, the IRS will notify the executor of theamount of taxes due. If this amount is paid,the executor will be discharged from personalliability for any future deficiencies. If the IRShas not notified the executor, he or she willbe discharged from personal liability at theend of the 9-month period.

CAUTION!

Even if the executor is discharged, the

IRS will still be able to assess taxdeficiencies against the executor to

the extent that he or she still has any of thedecedent's property.

Form 5495. Form 5495, Request for Dis-charge from Personal Liability Under InternalRevenue Code Section 6905, can be used formaking this request. If Form 5495 is not used,you must clearly indicate that the request isfor discharge from personal liability undersection 6905 of the Internal Revenue Code.

Insolvent estate. If a decedent's estate isinsufficient to pay all the decedent's debts, thedebts due the United States must be paidfirst. Both the decedent's federal income taxliabilities at the time of death and the estate'sincome tax liability are debts due the UnitedStates. The personal representative of an in-solvent estate is personally responsible forany tax liability of the decedent or of the es-tate if he or she had notice of such tax obli-gations or had failed to exercise due care indetermining if such obligations existed beforedistribution of the estate's assets and beforebeing discharged from duties. The extent ofsuch personal responsibility is the amount ofany other payments made before paying thedebts due the United States. The income taxliabilities need not be formally assessed forthe personal representative to be liable if heor she was aware or should have been awareof their existence.

Fees Received byPersonal RepresentativesAll personal representatives must include intheir gross incomes fees paid to them froman estate. If paid to a professional executoror administrator, self-employment tax alsoapplies to such fees. For a nonprofessionalexecutor or administrator (a person serving insuch capacity in an isolated instance, suchas a friend or relative of the decedent), self-employment tax only applies if a trade or

business is included in the estate's assets,the executor actively participates in the busi-ness, and the fees are related to operationof the business.

Final Returnfor DecedentThe personal representative (defined earlier)must file the final income tax return of thedecedent for the year of death and any re-turns not filed for preceding years. A survivingspouse, under certain circumstances, mayhave to file the returns for the decedent. SeeJoint Return, below.

Return for preceding year. If an individualdied after the close of the tax year, but beforethe return for that year was filed, the returnfor the year just closed will not be the finalreturn. The return for that year will be a reg-ular return and the personal representativemust file it.

Example. Samantha Smith died onMarch 21, 1997, before filing her 1996 taxreturn. Her personal representative must fileher 1996 return by April 15, 1997. Her finaltax return is due April 15, 1998.

Filing RequirementsThe gross income, age, and filing status of a

decedent generally determine whether a re-turn must be filed. Gross income usuallymeans money, goods, and property an indi-vidual received on which he or she must paytax. It includes gross receipts from self-employment minus any cost of goods sold. Itdoes not include nontaxable income. Ingeneral, filing status depends on whether thedecedent was considered single or marriedat the time of death. See Publication 501,Exemptions, Standard Deduction, and FilingInformation.

RefundA return should be filed to obtain a refund iftax was withheld from salaries, wages, pen-sions, or annuities, or if estimated tax waspaid, even if a return is not required to befiled. Also, the decedent may be entitled toother credits that result in a refund. Theseadvance payments of tax and credits arediscussed later under Credits, Other Taxes,and Payments.

Form 1310. Generally, a person who isfiling a return for a decedent and claiming arefund must file a Form 1310, Statement ofPerson Claiming Refund Due a DeceasedTaxpayer, with the return. However, if theperson claiming the refund is a survivingspouse filing a joint return with the decedent,or a court-appointed or certified personalrepresentative filing an original return for the

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decedent, Form 1310 is not needed. Thepersonal representative must attach to thereturn a copy of the court certificate showingthat he or she was appointed the personalrepresentative.

Example. Assume that Mr. Green diedon January 4, 1997, before filing his tax re-turn. On April 3 of the same year, you wereappointed the personal representative for Mr.Green's estate, and you filed his Form 1040showing a refund due. You do not need Form1310 to claim the refund if you attach a copy

of the court certificate showing you were ap-pointed the personal representative.

Nonresident AlienIf the decedent was a nonresident alien whowould have had to file Form 1040NR, U.S.Nonresident Alien Income Tax Return, youmust file that form for the decedent's final taxyear. See the instructions for Form 1040NRfor the filing requirements, due date, andwhere to file.

Joint ReturnGenerally, the personal representative andthe surviving spouse can file a joint return forthe decedent and the surviving spouse.

However, the surviving spouse alone can filethe joint return if no personal representativehas been appointed before the due date forfiling the final joint return for the year of death.This also applies to the return for the pre-ceding year if the decedent died after theclose of the preceding tax year and before thedue date for filing that return. The income ofthe decedent that was includible on his or herreturn for the year up to the date of death (seeIncome To Include, later) and the income ofthe surviving spouse for the entire year mustbe included in the final joint return.

A final joint return with the deceasedspouse cannot be filed if the surviving spouseremarried before the end of the year of thedecedent's death. The filing status of the de-

ceased spouse in this instance is marriedfiling separate return.For information about tax benefits a sur-

viving spouse may be entitled to, see TaxBenefits for Survivors, later under Other TaxInformation.

Personal representative may revoke jointreturn election. A court-appointed personalrepresentative may revoke an election to filea joint return that was previously made by thesurviving spouse alone. This is done by filinga separate return for the decedent within oneyear from the due date of the return (includingany extensions). The joint return made by thesurviving spouse will then be regarded as theseparate return of that spouse by excludingthe decedent's items and refiguring the taxliability.

Income To IncludeThe decedent's income includible on the finalreturn is generally determined as if the personwere still alive except that the taxable periodis usually shorter because it ends on the dateof death. The method of accounting regularlyused by the decedent before death also de-termines the income includible on the finalreturn. This section explains how some typesof income are reported on the final return.

For more information about accountingmethods, get Publication 538, AccountingPeriods and Methods.

Under the Cash MethodIf the decedent accounted for income underthe cash method, only those items actuallyor constructively received before death areaccounted for in the final return.

Constructive receipt of income. Interestfrom coupons on the decedent's bonds wasconstructively received by the decedent if thecoupons matured in the decedent's final taxyear, but had not been cashed. Include theinterest in the final return.

Generally, a dividend was constructivelyreceived if it was available for use by the de-cedent without restriction. If the corporationcustomarily mailed its dividend checks, thedividend was includible when received. If theindividual died between the time the dividendwas declared and the time it was received inthe mail, the decedent did not constructivelyreceive it before death. Do not include thedividend in the final return.

Under an Accrual MethodGenerally, under an accrual method of ac-counting, income is reported when earned.

If the decedent used an accrual method,only the income items normally accrued be-

fore death are to be included in the final re-turn.

Partnership IncomeThe death of a partner generally does notclose the partnership's tax year before itnormally ends. It continues for both the re-maining partners and the deceased partner.Even if the partnership has only two partners,the death of one does not terminate the part-nership or close its tax year, provided thedeceased partner's estate or successor con-tinues to share in the partnership's profits orlosses. If the surviving partner terminates thepartnership by discontinuing its business op-erations, the partnership tax year closes asof the date of termination. If the deceased

partner's estate or successor sells, ex-changes, or liquidates its entire interest in thepartnership, the partnership's tax year for theestate or successor will close as of the dateof the sale or exchange or the date the liqui-dation is completed.

On the decedent's final return include thedecedent's distributive share of partnershipincome for the partnership's tax year endingwithin or with the decedent's last tax year (theyear ending on the date of death).

Do not include on the final return the dis-tributive share of partnership income for apartnership's tax year ending after the dece-dent's death. In this case, partnership incomeearned up to and including the date of deathis income in respect of the decedent, dis-

cussed later. Income earned after the dateof death to the end of the partnership's taxyear is income to the estate or successor ininterest.

Example. Mary Smith was a partner inXYZ partnership and reported her income ona tax year ending December 31. The part-nership uses a tax year ending June 30. Marydied August 31, 1997, and her estate estab-lished its tax year ending August 31.

The distributive share of taxable incomefrom the partnership based on the decedent'spartnership interest is reported as follows:

1) Final Return for the Decedent January1 through August 31, 1997, includes in-

come from the XYZ partnership yearending June 30, 1997.

2) Income Tax Return of the Estate September 1, 1997, through August 31,1998, includes income from the XYZpartnership year ending June 30, 1998.The portion of income from the partner-ship for the period July 1, 1997, throughAugust 31, 1997, is income in respectof a decedent.

S Corporation IncomeIf the decedent was a shareholder in an Scorporation, you must include on the final re-turn the decedent's share of S corporationincome for the corporation's tax year thatends within or with the decedent's last taxyear (year ending on the date of death). Thefinal return must also include the decedent'spro rata share of the S corporation's incomefor the period between the end of the corpo-ration's last tax year and the date of death.

The income for the part of the S corpo-ration's tax year after the shareholder's deathis income to the estate or other person whohas acquired the stock in the S corporation.

Self-Employment Income

Include self-employment income actually orconstructively received or accrued, dependingon the decedent's accounting method. Forself-employment tax purposes only, the de-cedent's self-employment income will includethe decedent's distributive share of a part-nership's income or loss through the end ofthe month in which death occurred. For thispurpose only, the partnership's income or lossis considered to be earned ratably over thepartnership's tax year.

Community IncomeIf the decedent was married and wasdomiciled in a community property state, halfof the income received and half of the ex-penses paid during the decedent's tax year

by either the decedent or spouse may beconsidered to be the income and expensesof the other. For more information, get Publi-cation 555, Community Property.

Interest and Dividend Income(Forms 1099)A Form 1099 should be received for the de-cedent reporting interest and dividends thatwere includible on his or her return beforedeath. A separate Form 1099 should be re-ceived showing the interest and dividendsincludible on the returns of the estate or otherrecipient after the date of death and payableto the estate or other recipient. You can re-quest corrected Forms 1099, if these formsdo not properly reflect the right recipient oramounts.

The amount reported on Form 1099INTor Form 1099DIV, Dividends and Distribu-tions, may not necessarily be the correctamount that should be properly reported oneach income tax return. For example, a Form1099INT reporting interest payable to a de-cedent may include income that should bereported on the final income tax return of thedecedent, as well as income that the estateor other recipient should report, either as in-come earned after death or as income in re-spect of the decedent (discussed later). Forincome earned after death, you should askthe payer for a Form 1099 that properlyidentifies the recipient (by name and identifi-

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cation number) and the proper amount. If thatis not possible, or if the form includes anamount that represents income in respect ofthe decedent, include an explanation, suchas that shown next, under How to report, de-scribing the amounts that are properly re-ported on the decedent's final return.

How to report. If you are preparing the de-cedent's final return and you have receiveda Form 1099INT or a Form 1099DIV for thedecedent that includes amounts belonging tothe decedent and to another recipient (thedecedent's estate or another beneficiary), re-port the total interest shown on Form1099INT on Schedule 1 (Form 1040A) or onSchedule B (Form 1040). Next, enter a sub-total of the interest shown on Forms 1099,and the interest reportable from other sourcesfor which you did not receive Forms 1099.Show any interest (including any interest youreceive as a nominee) belonging to anotherrecipient separately and subtract it from thesubtotal. Identify the amount of this adjust-ment as Nominee Distribution or other ap-propriate designation. Report dividend in-come on the appropriate schedule using thesame procedure.

Note. If the decedent received amounts

as a nominee, you must give the actual ownera Form 1099, unless the owner is the dece-dent's spouse.

Medical Savings AccountThe treatment of a medical savings account(MSA) at the death of the account holder de-pends on who acquires the interest in theaccount. If the estate of the holder acquiresthe interest, the fair market value of the as-sets in the account on the date of death isincluded in gross income on the decedent'sfinal return. The estate tax deduction, dis-cussed later, does not apply to this amount.

If a beneficiary acquires the interest, seethe discussion under Income in Respect ofthe Decedent, later. For other information on

MSAs, see Publication 969.

Accelerated Death BenefitsIf certain requirements are met, accelerateddeath benefits are excluded from the recipi-ent's income. Accelerated death benefits areamounts received under a life insurancecontract before the death of the insured indi-vidual. These benefits also include amountsreceived on the sale or assignment of thecontract to a viatical settlement provider. Thisexclusion applies only if the insured was aterminally or chronically ill individual.

Generally, if the decedent received accel-erated death benefits either on his or her ownlife or on the life of another person, thosebenefits are not included in the decedent's

income. For more information, see the dis-cussion under Gifts, Insurance, and Inher-itancesunder Other Tax Information, later.

Exemptionsand DeductionsGenerally, the rules for exemptions and de-ductions allowed to an individual also applyto the decedent's final income tax return.Show on the final return deductible items thedecedent paid before death (or accrued, if thedecedent reported deductions on an accrualmethod). This section contains a detaileddiscussion of medical expenses because,under certain conditions, the tax treatment

can be different for the medical expenses ofthe decedent. See Medical Expenses, below.

ExemptionsYou can claim the personal exemption in fullon a final income tax return. If the decedentwas another person's dependent (i.e., a par-ent's), you cannot claim the personal ex-emption on the decedent's final return.

Standard Deduction

If you do not itemize deductions on the finalreturn, the full amount of the appropriatestandard deduction is allowed regardless ofthe date of death. For information on the ap-propriate standard deduction, get Publication501.

Medical ExpensesMedical expenses paid before death by thedecedent are deductible on the final incometax return if deductions are itemized. This in-cludes expenses for the decedent as well asfor the decedent's spouse and dependents.

CAUTION

!Qualified medical expenses paid be-fore death by the decedent are notdeductible if paid with a tax-free dis-

tribution from a medical savings account.

Election for decedent's expenses. Medicalexpenses that were not paid before death areliabilities of the estate and are shown on thefederal estate tax return (Form 706). How-ever, if medical expenses for the decedentare paid out of the estate during the 1yearperiod beginning with the day after death, youcan elect to treat all or part of the expensesas paid by the decedent at the time they wereincurred.

If you make the election, you can claimall or part of the expenses on the decedent'sincome tax return rather than on the federalestate tax return (Form 706). You can deductexpenses incurred in the year of death on thefinal income tax return. You should file an

amended return (Form 1040X) for medicalexpenses incurred in an earlier year, unlessthe statutory period for filing a claim for thatyear has expired.

The amount you can deduct on the in-come tax return is the amount above 7.5%of adjusted gross income. The amounts notdeductible because of this percentage cannotbe claimed on the federal estate tax return.

Making the election. You make theelection by filing with the decedent's incometax return, or amended return, a statement induplicate that you have not claimed theamount as an estate tax deduction, and thatthe estate waives the right to claim theamount as a deduction. This election appliesonly to expenses incurred for the decedent,

not to expenses incurred to provide medicalcare for dependents.

Example. Richard Brown used the cashmethod of accounting and filed his income taxreturn on a calendar year basis. Mr. Browndied on June 1, 1997, after incurring $800 inmedical expenses. Of that amount, $500 wasincurred in 1996 and $300 was incurred in1997. Richard filed his 1996 income tax returnbefore April 15, 1997. The personal repre-sentative of the estate paid the entire $800liability in August 1997.

The personal representative may then filean amended return (Form 1040X) for 1996claiming the $500 medical expense as a de-duction, subject to the 7.5% limit. The $300

of expenses incurred in 1997 can be de-ducted on the final income tax return, subjectto the 7.5% limit. The personal representativemust file a statement in duplicate with eachreturn stating that these amounts have notbeen claimed on the federal estate tax return(Form 706), and waiving the right to claimsuch a deduction on Form 706 in the future.

Medical expenses not paid by estate. Ifyou paid medical expenses for your deceasedspouse or dependent, claim the expenses onyour tax return for the year in which you paidthem, whether they are paid before or afterthe decedent's death. If the decedent was achild of divorced or separated parents, themedical expenses can usually be claimed byboth the custodial and noncustodial parent tothe extent paid by that parent during the year.

Insurance reimbursements. Insurance re-imbursements of previously deducted medicalexpenses due a decedent at the time of deathand later received by the decedent's estateare includible in the income tax return of theestate (Form 1041) for the year the re-imbursements are received. The reimburse-ments are also includible in the decedent'sgross estate.

Deduction for LossesA decedent's net operating loss deductionfrom a prior year and any capital losses(capital losses include capital loss carryovers)can be deducted only on the decedent's finalincome tax return. A net operating loss on thedecedent's final income tax return can becarried back to prior years.You cannot deductany unused net operating loss or capital losson the estate's income tax return.

At-risk loss limits. Special at-risk rules ap-ply to most activities that are engaged in asa trade or business or for the production ofincome.

These rules limit the amount of deductible

loss to the amount for which the individualwas considered at risk in the activity. An in-dividual generally will be considered at risk tothe extent of the cash and the adjusted basisof property that he or she contributed to theactivity and any amounts the individual bor-rowed for use in the activity. However, an in-dividual will be considered at risk for amountsborrowed only if he or she was personally li-able for the repayment or if the amounts bor-rowed were secured by property other thanthat used in the activity. The individual is notconsidered at risk for borrowed amounts if thelender has an interest in the activity or if thelender is related to a person who has an in-terest in the activity. For more information, getPublication 925, Passive Activity and At-RiskRules.

Passive activity rules. A passive activity isany trade or business activity in which thetaxpayer does not materially participate. Todetermine material participation, get Publica-tion 925. Rental activities are also passiveactivities regardless of the taxpayer's partic-ipation, unless the taxpayer meets certain el-igibility requirements.

Individuals, estates, and trusts can offsetpassive activity losses only against passiveactivity income. Passive activity losses orcredits that are not allowed in one tax yearcan be carried forward to the next year.

In general, if a passive activity interest istransferred because of the death of a tax-

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payer, the accumulated unused passive ac-tivity losses are allowed as a deductionagainst the decedent's income in the year ofdeath. Losses are allowed only to the extentthey are greater than the excess of thetransferee's (recipient of the interest trans-ferred) basis in the property over the dece-dent's adjusted basis in the property imme-diately before death. The portion of the lossesthat is equal to the excess is not allowed asa deduction for any tax year.

Use Form 8582, Passive Activity LossLimitations, to summarize losses and incomefrom passive activities and to figure theamounts allowed. For more information, getPublication 925.

Credits, Other Taxes,and PaymentsThis section includes brief discussions ofsome of the tax credits, types of taxes thatmay be owed, income tax withheld, and esti-mated tax payments that are reported on thefinal return of a decedent.

CreditsYou can claim on the final income tax returnany tax credits that applied to the decedentbefore death. Some of these credits are dis-cussed next.

Earned income credit. If the decedent wasan eligible individual, you can claim theearned income credit on the decedent's finalreturn even though the return covers lessthan 12 months. If the allowable credit is morethan the tax liability for the year, the excessis refunded.

For more information, get Publication 596,Earned Income Credit.

Credit for the elderly or the disabled. Thiscredit is allowable on a decedent's final in-come tax return if the decedent was age 65or older or had retired before the end of thetax year on permanent and total disability.

For more information, get Publication 524,Credit for the Elderly or the Disabled.

General business tax credit. The generalbusiness credit available to a taxpayer is lim-ited. Any unused credit generally is carriedback 3 years and then carried forward for upto 15 years. After the 15year period, a de-duction may be allowed for any unused busi-ness credit. If the taxpayer dies before theend of the 15year period, the deductiongenerally is allowed in the year of death.

For more information, get Publication 334,Tax Guide for Small Business.

Other TaxesTaxes other than income tax that may beowed on the final return of a decedent includeself-employment tax and alternative minimumtax, which are reported in the Other Taxessection of Form 1040.

Self-employment tax. If the decedent hadnet earnings from self-employment of $400or more in the year of death, self-employmenttax may be owed on the final return.

Alternative minimum tax (AMT). The taxlaws give special treatment to some kinds ofincome and allow special deductions andcredits for some kinds of expenses. So that

taxpayers who benefit from these laws willpay at least a minimum amount of tax, aspecial tax has been enactedthe alterna-tive minimum tax (AMT). In general, the AMTis the excess of the tentative minimum taxover the regular tax shown on the return.

Form 6251. Use Form 6251, AlternativeMinimum TaxIndividuals, to determine ifthis tax applies to the decedent. See the forminstructions for information on when you mustattach the form to the tax return.

Payments of TaxThe income tax withheld from the decedent'ssalary, wages, pensions, or annuities, and theamount paid as estimated tax, for example,are credits (advance payments of tax) thatyou must claim on the final return.

Name, Address,and SignatureThe word DECEASED, the decedent'sname, and the date of death should be writtenacross the top of the tax return. In the nameand address space you should write the nameand address of the decedent and the surviv-ing spouse. If a joint return is not being filed,the decedent's name should be written in thename space and the personal represen-tative's name and address should be writtenin the remaining space.

Signature. If a personal representative hasbeen appointed, that person must sign thereturn. If it is a joint return, the survivingspouse must also sign it. If no personal rep-resentative has been appointed, the survivingspouse (on a joint return) should sign the re-turn and write in the signature area Filing assurviving spouse. If no personal represen-tative has been appointed and if there is nosurviving spouse, the person in charge of thedecedent's property must file and sign thereturn as personal representative.

When and Where To FileThe final individual income tax return is dueat the same time the decedent's return wouldhave been due had death not occurred. Afinal return for a decedent who was a calen-dar year taxpayer is generally due on April15 following the year of death, regardless ofwhen during the year death occurred. How-ever, when the due date falls on a Saturday,Sunday, or legal holiday, you can file on thenext business day.

The tax return must be prepared on a formfor the year of death regardless of when dur-ing the year death occurred.

File the final income tax return of the de-cedent with the Internal Revenue Service

center for the place where you live. You alsomay handcarry the return to any office of thedistrict director within your district.

Tax Forgiveness forDeaths Due toMilitary or Terrorist Actions

If the decedent was a member of the ArmedForces or a civilian employee of the UnitedStates, the decedent's income tax liabilitymay be forgiven if his or her death was dueto service in a combat zone or to military orterrorist actions.

Combat ZoneIf a member of the Armed Forces of theUnited States dies while in active service ina combat zone or from wounds, disease, orinjury incurred in a combat zone, the dece-dent's income tax liability is abated (forgiven)for the entire year in which death occurredand for any prior tax year ending on or afterthe first day the person served in a combatzone in active service. For this purpose, aqualified hazardous duty area is treated as acombat zone.

If the tax (including interest, additions tothe tax, and additional amounts) for theseyears has been assessed, the assessmentwill be forgiven. If the tax has been collected(regardless of the date of collection), that taxwill be credited or refunded.

Any of the decedent's income tax for taxyears before those mentioned above that re-mains unpaid as of the actual (orpresumptive) date of death will not be as-sessed. If any unpaid tax (including interest,additions to the tax, and additional amounts)has been assessed, this assessment will beforgiven. Also, if any tax was collected afterthe date of death, that amount will be creditedor refunded.

The date of death of a member of the

Armed Forces reported as missing in actionor as a prisoner of war is the date his or hername is removed from missing status formilitary pay purposes. This is true even ifdeath actually occurred earlier.

Military or Terrorist ActionsThe decedent's income tax liability is forgivenif, at death, he or she was a military or civilianemployee of the United States who died be-cause of wounds or injury incurred:

1) While a U.S. employee, and

2) In a military or terrorist action outsidethe United States.

The forgiveness applies to the tax year inwhich death occurred and for any prior taxyear in the period beginning with the yearbefore the year in which the wounds or injuryoccurred.

Example. The income tax liability of acivilian employee of the United States whodied in 1997 because of wounds incurredwhile a U.S. employee outside the UnitedStates in a terrorist attack that occurred in1987 will be forgiven for 1997 and for all priortax years in the period 19861996. Refundsare allowed for the tax years for which theperiod for filing a claim for refund has notended, as discussed later.

Military or terrorist action defined. Militaryor terrorist action means:

1) Any terrorist activity that most of the ev-idence indicates was directed againstthe United States or any of its allies, and

2) Any military action involving the U.S.Armed Forces and resulting from vi-olence or aggression against the UnitedStates or any of its allies, or the threatof such violence or aggression.

Military action does not include trainingexercises. Any multinational force in whichthe United States is participating is treatedas an ally of the United States.

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Claim for Credit or RefundIf any of these tax-forgiveness situations ap-plies to a prior year tax, any tax paid for whichthe period for filing a claim has not ended willbe credited or refunded; if any tax is still due,it will be canceled. The normal period for fil-ing a claim for credit or refund is 3 years afterthe return was filed or 2 years after the taxwas paid, whichever is later.

If death occurred in a combat zone or fromwounds, disease, or injury incurred in a com-bat zone, the period for filing the claim is ex-

tended by:

1) The amount of time served in the combatzone (including any period in which theindividual was in missing status); plus

2) The period of continuous qualifiedhospitalization for injury from service inthe combat zone, if any; plus

3) The next 180 days.

Qualified hospitalization means anyhospitalization outside the United States, andany hospitalization in the United States of notmore than 5 years.

Filing a claim. Use the following proceduresto file a claim.

1) If a U.S. individual income tax return(Form 1040, 1040A, or 1040EZ) has notbeen filed, you should make a claim forrefund of any withheld income tax orestimated tax payments by filing Form1040, 1040A, or 1040EZ. Form W2,Wage and Tax Statement, must accom-pany all returns.

2) If a U.S. individual income tax return hasbeen filed, you should make a claim forrefund by filing Form 1040X. You mustfile a separate Form 1040X for each yearin question.

You must file these returns and claimswith the Internal Revenue Service, P.O. Box

267, Covington, KY 41019, Attn: Stop 28.Identify all returns and claims for refundby writing Desert Storm KIA or FormerYugoslavia KIA in bold letters on the topof page 1 of the return or claim. On Forms1040 and 1040X, the phrase Desert Storm

KIA or Former Yugoslavia KIA mustbe written on the line for total tax. If the in-dividual was killed in a terroristic or militaryaction outside the United States, put KITAon the front of the return and on the line fortotal tax.

An attachment should include a computa-tion of the decedent's tax liability and a com-putation of the amount that is to be forgiven.On joint returns, you must make an allocationof the tax as described later under Joint re-turns. If you cannot make a proper allocation,

you should attach a statement of all incomeand deductions allocable to each spouse andthe IRS will make the proper allocation.

The following necessary documentsmust accompany all returns and claims forrefund under these procedures:

1) Form 1310, Statement of Person Claim-ing Refund Due a Deceased Taxpayer.

2) A certification from the Department ofDefense or the Department of State thatthe death was due to military or terroristaction outside the United States. Formilitary employees and civilian employ-ees of the Department of Defense, cer-tification must be made by that depart-

ment on Form DOD 1300. For civilianemployees of all other agencies, certif-ication must be a letter signed by theDirector General of the Foreign Service,Department of State, or his/her delegate.The certification must include the indi-vidual's name and social security num-ber, the date of injury, the date of death,and a statement that the individual diedas the result of a military or terroristaction outside the United States and wasan employee of the United States at thedate of injury and at the date of death.

If the certification has been received, butyou do not have enough tax information to filea timely claim for refund, you can suspend theperiod for filing a claim by filing Form 1040X,attaching Form 1310 and a statement that anamended claim will be filed as soon as youhave the required tax information.

Joint returns. If a joint return was filed,only the decedent's part of the income tax li-ability is eligible for the refund. Determine thedecedent's tax liability as follows:

1) Figure the income tax for which the de-cedent would have been liable if a sep-arate return had been filed.

2) Figure the income tax for which the

spouse would have been liable if a sep-arate return had been filed.

3) Multiply the joint tax liability by a fraction.The numerator (top number) of the frac-tion is the amount in (1), above. Thedenominator (bottom number) of thefraction is the total of (1) and (2).

The amount in (3) above is the decedent'stax liability that is eligible for the refund.

Filing RemindersTo minimize the time needed to process thedecedent's final return and issue any refund,be sure to follow these procedures:

1) Write DECEASED, the decedent'sname, and the date of death across thetop of the tax return.

2) If a personal representative has beenappointed, the personal representativemust sign the return. If it is a joint return,the surviving spouse must also sign it.

3) If you are the decedent's spouse filing ajoint return with the decedent and nopersonal representative has been ap-pointed, write Filing as surviving spousein the area where you sign the return.

4) If no personal representative has beenappointed and if there is no survivingspouse, the person in charge of the de-cedent's property must file and sign the

return as personal representative.5) To claim a refund for the decedent:

a) If you are the decedent's spousefiling a joint return with the dece-dent, file only the tax return to claimthe refund.

b) If you are the personal represen-tative and the return is not a jointreturn filed with the decedent's sur-viving spouse, file the return andattach a copy of the certificate thatshows your appointment by thecourt. (A power of attorney or acopy of the decedent's will is notacceptable evidence of your ap-

pointment as the personal repre-sentative). If you are filing anamended return, attach Form 1310and a copy of the certificate of ap-pointment (or, if you have alreadysent the certificate of appointmentto IRS, write Certificate PreviouslyFiled at the bottom of Form 1310).

c) If you are not filing a joint return asthe surviving spouse and a personalrepresentative has not been ap-pointed, file the return and attach

Form 1310 and proof of death(generally, a copy of the death cer-tificate).

Other Tax InformationThis section contains information about theeffect of an individual's death on the incometax liability of the survivors (including widowsand widowers), the beneficiaries, and the es-tate.

Your Federal Income Tax (Publication17), published by the IRS, contains compre-hensive information to help individual taxpay-ers prepare their own income tax returns.

Also, there are many other taxpayer informa-tion publications on specific topics. You canget single copies of these publications freefrom the IRS Forms Distribution Center. SeeHow To Get More Information near the endof this publication.

Tax Benefits for Survivors

Survivors can qualify for certain benefits whenfiling their own income tax returns.

Joint return by surviving spouse. A sur-viving spouse can file a joint return for theyear of death and may qualify for special taxrates for the following 2 years, as explainedunder Qualifying widows and widowers, be-low.

Decedent as your dependent. If the dece-dent qualified as your dependent for the partof the year before death, you can claim thefull exemption amount for the dependent onyour tax return, regardless of when deathoccurred during the year.

Qualifying widows and widowers. If yourspouse died within the 2 tax years precedingthe year for which your return is being filed,you may be eligible to claim the filing statusof qualifying widow(er) with dependent childand qualify to use the Married filing jointlytaxrates.

Requirements. Generally, you qualify forthis special benefit if you meet all of the fol-lowing requirements:

1) You were entitled to file a joint return withyour spouse for the year ofdeathwhether or not you actually filed

jointly;

2) You did not remarry before the end ofthe current tax year;

3) You have a child, stepchild, or fosterchild who qualifies as your dependent forthe tax year; and

4) You provide more than half the cost ofmaintaining your home, which is the

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principal residence of that child for theentire year except for temporary ab-sences.

Example. William Burns's wife died in1995. Mr. Burns has not remarried and cont-inued throughout 1996 and 1997 to maintaina home for himself and his dependent child.For 1995 he was entitled to file a joint returnfor himself and his deceased wife. For 1996and 1997, he qualifies to file as a Qualifyingwidow(er) with dependent child. For lateryears, he may qualify to file as a head ofhousehold.

Figuring your tax. Include only your ownincome, exemptions, and deductions in figur-ing your tax, but check the box on line 5(Form 1040 or 1040A) under filing status onyour tax return and enter the year of death inthe parentheses. Use the Tax Rate Scheduleor the column in the Tax Table for Marriedfiling jointly, which gives you the split-incomebenefits.

The last year you can file jointly with, orclaim an exemption for, your deceasedspouse is the year of death.

Joint return filing rules. If you are the sur-viving spouse and a personal representative

is handling the estate for the decedent, youshould coordinate filing your return for theyear of death with this personal represen-tative. See Joint Return earlier under FinalReturn for Decedent.

Income in Respectof the DecedentAll gross income that the decedent wouldhave received had death not occurred, thatwas not properly includible on the final return,discussed earlier, is income in respect of thedecedent.

How To ReportIncome in respect of a decedent must be in-cluded in the gross income of:

1) The decedent's estate, if the estate re-ceives it, or

2) The beneficiary, if the right to income ispassed directly to the beneficiary and thebeneficiary receives it, or

3) Any person to whom the estate properlydistributes the right to receive it.

Example 1. Frank Johnson owned andoperated an apple orchard. He used the cashmethod of accounting. He sold and delivered1,000 bushels of apples to a canning factory

for $2,000, but did not receive payment be-fore his death. When the estate was settled,payment had not been made and the estatetransferred the right to the payment to hiswidow. When Frank's widow collects the$2,000, she must include that amount in herreturn. It is not to be reported on the final re-turn of the decedent nor on the return of theestate.

Example 2. Assume Frank Johnson usedthe accrual method of accounting in Example1. The amount accrued from the sale of theapples would be included on his final return.Neither the estate nor the widow will realizeincome in respect of the decedent when themoney is later paid.

Example 3. On February 1, George High,a cash method taxpayer, sold his tractor for$3,000, payable March 1 of the same year.His adjusted basis in the tractor was $2,000.Mr. High died on February 15, before receiv-ing payment. The gain to be reported as in-come in respect of the decedent is the $1,000difference between the decedent's basis inthe property and the sale proceeds. In otherwords, the income in respect of the decedentis the gain the decedent would have realizedhad he lived.

Example 4. Cathy O'Neil was entitled toa large salary payment at the date of herdeath. The amount was to be paid in five an-nual installments. The estate, after collectingtwo installments, distributed the right to theremaining installments to you, the beneficiary.None of the payments would be included inCathy's final return. The estate must includein its gross income the two installments it re-ceived, and you must include in your grossincome each of the three installments as youreceive them.

Example 5. You inherited the right to re-ceive renewal commissions on life insurancesold by your father before his death. You in-herited the right from your mother, who ac-

quired it by bequest from your father. Yourmother died before she received all the com-missions she had the right to receive, so youreceived the rest. None of these commissionswere included in your father's final return. Butthe commissions received by your motherwere included in her gross income. Thecommissions you received are not includiblein your mother's gross income, even on herfinal return. You must include them in yourincome.

Character of income. The character of theincome you receive in respect of a decedentis the same as it would have been to the de-cedent if he or she were alive. If the incomewould have been a capital gain to the dece-

dent, it will be a capital gain to you.

Transfer of right to income. If you transferyour right to income in respect of a decedent,you must include in your income the greaterof:

1) The amount you receive for the right, or

2) The fair market value of the right youtransfer.

If you make a gift of such a right, you mustinclude in your gross income the fair marketvalue of the right at the time of the gift.

If the right to income from an installmentobligation is transferred, the amount you mustinclude in income is reduced by the basis of

the obligation. See Installment obligations,below.

Transfer defined. A transfer for this pur-pose includes a sale, exchange, or other dis-position, the satisfaction of an installmentobligation at other than face value, or thecancellation of an installment obligation.

Installment obligations. If the decedent hadsold property using the installment methodand you collect payments on an installmentobligation you acquired from the decedent,use the same gross profit percentage thedecedent used to figure the part of eachpayment that represents profit. Include in yourincome the same profit the decedent would

have included had death not occurred. GetPublication 537, Installment Sales.

If you dispose of an installment obligationacquired from a decedent (other than bytransfer to the obligor), the rules explained inPublication 537 for figuring gain or loss on thedisposition apply to you.

Transfer to obligor. A transfer of a rightto income, discussed earlier, has occurred ifthe decedent (seller) had sold property usingthe installment method and the installmentobligation is transferred to the obligor (buyeror person legally obligated to pay the install-ments). A transfer also occurs if the obligationis canceled either at death or by the estateor person receiving the obligation from thedecedent. An obligation that becomes unen-forceable is treated as having been canceled.

If such a transfer occurs, the amount in-cluded in the income of the transferor (theestate or beneficiary) is the greater of theamount received or the fair market value ofthe installment obligation at the time oftransfer, reduced by the basis of the obli-gation. The basis of the obligation is the de-cedent's basis, adjusted for all installmentpayments received after the decedent's deathand before the transfer.

If the decedent and obligor were relatedpersons, the fair market value of the obli-

gation cannot be less than its face value.

Specific Types of Incomein Respect of a DecedentThis section explains and provides examplesof some specific types of income in respectof a decedent.

Wages. The entire amount of wages or otheremployee compensation earned by the de-cedent but unpaid at the time of death is in-come in respect of the decedent. The incomeis not reduced by any amounts withheld bythe employer when paid to the estate or otherbeneficiary. If the income is $600 or more, theemployer should report it in box 3 of Form

1099MISC and give the recipient a copy ofthe form or a similar statement.Wages paid as income in respect of a

decedent are not subject to federal incometax withholding. However, if paid during thecalendar year of death, they are subject towithholding for social security and Medicaretaxes. These taxes should be included on thedecedent's Form W2 with the taxes withheldbefore death. Wages paid as income in re-spect of a decedent after the year of deathgenerally are not subject to withholding forany federal taxes.

Farm income from crops, crop shares, andlivestock. A farmer's growing crops andlivestock at the date of death would notnormally give rise to income in respect of adecedent or income to be included in the finalreturn. However, when a cash method farmerreceives rent in the form of crop shares orlivestock and owns the crop shares or live-stock at the time of death, the rent is incomein respect of a decedent and is reported in theyear in which the crop shares or livestock aresold or otherwise disposed of. The sametreatment applies to crop shares or livestockthe decedent had a right to receive as rentat the time of death for economic activitiesthat occurred before death.

If the individual died during a rent period,only the portion of the proceeds from theportion of the rent period ending with deathis income in respect of a decedent. The pro-

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ceeds from the portion of the rent period fromthe day after death to the end of the rent pe-riod are income to the estate. Cash rent orcrop shares and livestock received as rentand reduced to cash by the decedent areincludible in the final return even though therent period did not end until after death.

Example. Alonzo Roberts, who used thecash method of accounting, leased part of hisfarm for a 1year period beginning March 1.The rental was one-third of the crop, payablein cash when the crop share is sold at thedirection of Roberts. Roberts died on June30 and was alive during 122 days of the rentalperiod. Seven months later, Roberts' personalrepresentative ordered the crop to be soldand was paid $1,500. Of the $1,500, 122/365,or $501, is income in respect of a decedent.The balance of the $1,500 received by theestate, $999, is income to the estate.

Partnership income. Any part of a distribu-tive share of partnership income of the estateor other successor in interest of a deceasedpartner that is for the period ending with thedate of the decedent's death is income in re-spect of a decedent. Any partnership incomefor the period after the decedent's death is

income of the estate or other successor ininterest. These rules apply to the partner-ship's tax year that ends after the date of thedecedent's death. See Partnership Incomeunder Income To Include, earlier in the sec-tion titled Final Return for Decedent.

If the partner who died had been receivingpayments representing a distributive shareor guaranteed payment in liquidation of thepartner's interest in a partnership, the re-maining payments made to the estate or othersuccessor interest are income in respect ofthe decedent. The estate or the successorreceiving the payments will have to includethem in gross income when received. Simi-larly, the estate or other successor in interestreceives income in respect of a decedent ifamounts are paid by a third person in ex-change for the successor's right to the futurepayments.

For a complete discussion of partnershiprules, get Publication 541, Partnerships.

U.S. Savings Bonds acquired from dece-dent. If Series EE U.S. Savings Bonds thatwere owned by a cash method individual whohad chosen to report the interest each year(or by an accrual method individual) aretransferred because of death, the increase invalue of the bonds (interest earned) in theyear of death up to the date of death mustbe reported on the decedent's final return.The transferee (estate or beneficiary) reportson its return only the interest earned after thedate of death.

The redemption values of U.S. SavingsBonds generally are available from localbanks or savings and loan institutions. Youalso can get such information from yournearest Federal Reserve Bank; or you canpurchase the Tables of Redemption Valuesfor U.S. Savings Bondsfrom the Superinten-dent of Documents, U.S. Government PrintingOffice, Washington, D.C. 204029325.

If the bonds transferred because of deathwere owned by a cash method individual whohad not chosen to report the interest eachyear and had purchased the bonds entirelywith personal funds, interest earned beforedeath must be reported in one of the followingways:

1) The person (executor, administrator,etc.) who must file the final income taxreturn of the decedent can electto in-clude in it all of the interest earned on thebonds before the decedent's death. Thetransferee (estate or beneficiary) thenincludes in its return only the interestearned after the date of death; or

2) If the election in (1), above, was notmade, the interest earned to the date ofdeath is income in respect of the dece-dent and is not included in the dece-

dent's final return. In this case, all of theinterest earned before and after the de-cedent's death is income to thetransferee (estate or beneficiary). Atransferee who uses the cash methodof accounting and who has not chosento report the interest annually may deferreporting any of it until the bonds arecashed or the date of maturity, which-ever is earlier. In the year the interest isreported, the transferee may claim adeduction for any federal estate tax paidthat arose because of the part of interest(if any) included in the decedent's estate.

Example 1. Your uncle, a cash methodtaxpayer, died and left you a $1,000 Series

EE Bond. He had bought the bond for $500and had not chosen to report the increase invalue each year. At the date of death, interestof $94 had accrued on the bond, and its valueof $594 at date of death was included in youruncle's estate. Your uncle's personal repre-sentative did not choose to include the $94accrued interest in the decedent's final in-come tax return. You are a cash method tax-payer and do not choose to report the in-crease in value each year as it is earned.Assuming you cash it when it reaches matu-rity value of $1,000, you would report $500interest income (the difference between ma-turity value of $1,000 and the original cost of$500) in that year. You also are entitled toclaim, in that year, a deduction for any federalestate tax resulting from the inclusion in your

uncle's estate of the $94 increase in value.

Example 2. If, in Example 1, the personalrepresentative had chosen to include the $94interest earned on the bond before death inthe final income tax return of your uncle, youwould report only $406 ($500 minus $94) asinterest when you cashed the bond at matu-rity. Since this $406 represents the interestearned after your uncle's death and was notincluded in his estate, no deduction for federalestate tax is allowable for this amount.

Example 3. Your uncle died owning Se-ries HH Bonds that he acquired in exchangefor Series EE Bonds. You were the benefi-ciary on these bonds. The decedent used the

cash method of accounting and had not cho-sen to report the increase in redemption priceof the Series EE Bonds each year as it ac-crued. Your uncle's personal representativemade no election to include any interestearned before death in the decedent's finalreturn. Your income in respect of the dece-dent is the sum of the unreported increase invalue of the Series EE Bonds, which consti-tuted part of the amount paid for Series HHBonds, and the interest, if any, payable on theSeries HH Bonds but not received as of thedate of the decedent's death.

Specific dollar amount legacy satisfiedby transfer of bonds. If you receive SeriesEE Bonds from an estate in satisfaction of a

specific dollar amount legacy and the dece-dent was a cash method taxpayer who didnot elect to report interest each year, only theinterest earned after you receive the bonds isyour income. The interest earned to the dateof death plus any further interest earned tothe date of distribution is income to (and re-portable by) the estate.

Cashing U.S. Savings Bonds. Whenyou cash a U.S. Savings Bond that you ac-quired from a decedent, the bank or otherpayer that redeems it must give you a Form1099INT, Interest Income, if the interest partof the payment you receive is $10 or more.Your Form 1099INT should show the differ-ence between the amount received and thecost of the bond. The interest shown on yourForm 1099INT will not be reduced by anyinterest reported by the decedent beforedeath, or, if elected, by the personal repre-sentative on the final income tax return of thedecedent, or by the estate on the estate's in-come tax return. Your Form 1099INT mayshow more interest than you must include inyour income.

You must make an adjustment on your taxreturn to report the correct amount of interest.Get Publication 550, Investment Income andExpenses, for information about the correctreporting of this interest.

Interest accrued on U.S. Treasury bonds.The interest accrued on U.S. Treasury bondsowned by a cash method taxpayer andredeemable for the payment of federal estatetaxes that was not received as of the date ofthe individual's death is income in respect ofthe decedent. This interest is not included inthe decedent's final income tax return. Theestate will treat such interest as taxable in-come in the tax year received if it chooses toredeem the U.S. Treasury bonds to pay fed-eral estate taxes. If the person entitled to thebonds by bequest, devise, or inheritance, orbecause of the death of the individual (owner)receives them, that person will treat the ac-crued interest as taxable income in the year

the interest is received. Interest that accrueson the U.S. Treasury bonds after the owner'sdeath does not represent income in respectof the decedent. The interest, however, istaxable income and must be included in thegross income of the respective recipients.

Interest accrued on savings certificates.The interest accrued on savings certificates(redeemable after death without forfeiture ofinterest) that is for the period from the dateof the last interest payment and ending withthe date of the decedent's death, but not re-ceived as of that date, is income in respectof a decedent. Interest for a period after thedecedent's death that becomes payable onthe certificates after death is not income in

respect of a decedent, but is taxable incomeincludible in the gross income of the respec-tive recipients.

Inherited IRAs. If a beneficiary receives alump-sum distribution from an IRA he or sheinherited, all or some of it may be taxable.The distribution is taxable in the year receivedas income in respect of a decedent up to thedecedent's taxable IRA balance. This is thedecedent's balance at the time of death, in-cluding unrealized appreciation and incomeaccrued to date of death, minus any nontax-able basis (nondeductible contributions).Amounts distributed that are more than thedecedent's entire IRA balance (includes tax-

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able and nontaxable amounts) at the time ofdeath are the income of the beneficiary.

If the beneficiary is the decedent's surviv-ing spouse and that spouse properly rollsover the distribution into another IRA, thedistribution is not currently taxed.

For the special rules on inherited IRAs,see Publication 590, Individual RetirementArrangements (IRAs) (Including SEP-IRAsand SIMPLE IRAs).

Medical savings account (MSA). The

treatment of an MSA at the death of the ac-count holder depends on who acquires theinterest in the account. If the decedent's es-tate acquired the interest, see the discussionunder Final Return for Decedent, earlier.

If the decedent's spouse is the designatedbeneficiary of the MSA, the MSA becomesthat spouse's MSA. It is subject to the rulesdiscussed in Publication 969.

Any other beneficiary (including a spousethat is not the designated beneficiary) mustinclude in gross income the fair market valueof the assets in the account on the decedent'sdate of death. This amount must be reportedfor the beneficiary's tax year that includes thedecedent's date of death. The amount in-cluded in gross income is reduced by thequalified medical expenses for the decedentthat are paid by the beneficiary within 1 yearafter the decedent's date of death. An estatetax deduction, discussed later, applies to theamount included in income by a beneficiary,other than the decedent's spouse.

Deductions in Respectof the DecedentItems such as business expenses, income-producing expenses, interest, and taxes, forwhich the decedent was liable but which arenot properly allowable as deductions on thedecedent's final income tax return, will be al-lowed when paid:

1) As a deduction to the estate; or

2) If the estate was not liable for them, asa deduction to the person who acquiredan interest in the decedent's property(subject to such obligations) because ofdeath.

Similar treatment is given to the foreigntax credit. A beneficiary who must pay a for-eign tax on income in respect of a decedentwill be entitled to claim the foreign tax credit.

Depletion. The deduction for percentagedepletion is allowable only to the person (es-tate or beneficiary) who has an economic in-terest in respect of the decedent to which thededuction relates, whether or not that personreceives the property from which the incomeis derived. An heir who (because of the de-cedent's death) receives income as a resultof the sale of units of mineral by the decedent(who used the cash method) will be entitledto the depletion allowance for that income. Ifthe decedent had not figured the deductionon the basis of percentage depletion, anydepletion deduction to which the decedentwas entitled at the time of death would beallowable on the decedent's final return, andno depletion deduction in respect of the de-cedent would be allowed anyone else.

For more information about depletion, getPublication 535, Business Expenses.

Estate Tax DeductionIncome that a decedent had a right to receiveis included in the decedent's gross estate andis subject to estate tax. This income in respectof a decedent is also taxed when received bythe recipient (estate or beneficiary). However,an income tax deduction is allowed to the re-cipient for the estate tax paid on the income.

The deduction for estate tax can beclaimed only for the same tax year in whichthe income in respect of the decedent mustbe included in the recipient's gross income.

(This also is true for income in respect of aprior decedent.)

Individuals can claim this deduction onlyas an itemized deduction, provided they areotherwise eligible to itemize deductions. Thisdeduction is not subject to the 2% limit onmiscellaneous itemized deductions. Estatescan claim the deduction on the line providedfor the deduction on Form 1041. For the al-ternative minimum tax computation, the de-duction is not included in the itemized de-ductions that are an adjustment to taxableincome.

If the income in respect of the decedentis capital gain income, for figuring the maxi-mum tax on net capital gain (or any net capitalloss limits), the gain must be reduced, but not

below zero, by any deduction for estate taxpaid on such gain.

Computation. To figure a recipient's estatetax deduction, determine

1) The estate tax that qualifies for the de-duction, and

2) The recipient's part of the deductible tax.

Deductible estate tax. The estate tax isthe tax on the taxable estate, reduced by anycredits allowed. The estate tax qualifying forthe deduction is the part for the net value ofall the items in the estate that represent in-come in respect of the decedent. Net valueis the excess of the items of income in respect

of the decedent over the items of expensesin respect of the decedent. The deductibleestate tax is the difference between the actualestate tax and the estate tax determinedwithout including net value.

Example 1. Jack Sage, an attorney whoused the cash method of accounting, died in1997. At the time of his death, he was entitledto receive $12,000 from clients for his ser-vices and he had accrued bond interest of$8,000, for a total income in respect of thedecedent of $20,000. He also owed $5,000for business expenses for which his estatewas liable. The income and expenses werereported on Jack's estate tax return.

The tax on Jack's estate was $9,460 after

credits. The net value of the items includedas income in respect of the decedent is$15,000 ($20,000 minus $5,000). The estatetax determined without including the $15,000in the taxable estate is $4,840, after credits.The estate tax that qualifies for the deductionis $4,620 ($9,460 minus $4,840).

Recipient's deductible part. Figure therecipient's part of the deductible estate taxby dividing the estate tax value of the itemsof income in respect of the decedent includedin the recipient's gross income (the numera-tor) by the total value of all items included inthe estate that represents income in respectof the decedent (the denominator). If theamount included in the recipient's gross in-

come is less than the estate tax value of theitem, use the lesser amount in the numerator.

Example 2. As the beneficiary of Jack'sestate (Example 1, above), you collect the$12,000 accounts receivable from the clientsduring 1997. You will include this amount inyour gross income for 1997. If you itemizeyour deductions for 1997, you can claim anestate tax deduction of $2,772 figured as fol-lows:

Value included in yourincome

Total value of incomein respect of decedent

Estate taxqualifying fordeduction

$12,000

$20,000$4,620 = $2,772

If the amount you collected for the ac-counts receivable was more than $12,000,you would still claim $2,772 as an estate taxdeduction because only the $12,000 actuallyreported on the estate tax return can be usedin the above computation. However, if youcollected less than the $12,000 reported onthe estate tax return, use the smaller amountto figure the estate tax deduction.

Estates. The estate tax deduction allowedan estate is figured in the same manner as

just discussed. However, any income in re-spect of a decedent received by the estateduring the tax year is reduced by any suchincome that is properly paid, credited, or re-quired to be distributed by the estate to abeneficiary. The beneficiary would includesuch distributed income in respect of a dece-dent for figuring the beneficiary's deduction.

Surviving annuitants. For the estate taxdeduction, an annuity received by a survivingannuitant under a joint and survivor annuitycontract is considered income in respect of adecedent. The deceased annuitant must have

died after the annuity starting date. You mustmake a special computation to figure the es-tate tax deduction for the surviving annuitant.See the Income Tax Regulations under Sec-tion 1.691(d)1.

Gifts, Insurance,and InheritancesProperty received as a gift, bequest, or in-heritance is not included in your income. Butif property you receive in this manner laterproduces income, such as interest, dividends,or rentals, that income is taxable to you. Theincome from property donated to a trust thatis paid, credited, or distributed to you is tax-able income to you. If the gift, bequest, or

inheritance is the income from property, thatincome is taxable to you.

If you receive property from a decedent'sestate in satisfaction of your right to the in-come of the estate, it is treated as a bequestor inheritance of income from property. SeeDistributions to Beneficiaries From an Estate,later.

InsuranceThe proceeds from a decedent's life insur-ance policy paid by reason of his or her deathgenerally are excluded from income. The ex-clusion applies to any beneficiary, whether afamily member or other individual, a corpo-ration, or a partnership.

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Veterans' insurance proceeds. Veterans'insurance proceeds and dividends are nottaxable either to the veteran or to the benefi-ciaries.

Interest on dividends left on deposit withthe Department of Veterans Affairs is nottaxable.

Life insurance proceeds. Life insuranceproceeds paid because of the death of theinsured (or because the insured is a memberof the U.S. uniformed services who is missingin action) are not taxable unless the policywas transferred to you for a valuable consid-eration. This rule also applies to benefits thatare paid because of the death of the insuredunder accident, health, and variable life in-surance policies and endowment contracts.However, if the proceeds are received in in-stallments, see the discussion under Insur-ance received in installments, below.

Accelerated death benefits. Beginning in1997, you can exclude from income acceler-ated death benefits you receive on the life ofan insured individual if certain requirementsare met. Accelerated death benefits areamounts received under a life insurancecontract before the death of the insured.These benefits also include amounts received

on the sale or assignment of the contract toa viatical settlement provider. This exclusionapplies only if the insured was a terminally illindividual or a chronically ill individual. Thisexclusion does not apply if the insured is adirector, officer, employee, or has a financialinterest in any trade or business carried onby you.

Terminally ill individual. A terminally illindividual is an individual who has been cer-tified by a physician as having an illness orphysical condition that is expected to result indeath in 24 months or less from the date ofcertification.

Chronically ill individual. A chronicallyill individual is an individual who has beencertified within the preceding 12month pe-

riod by a licensed health care practitioner as:

1) Being unable to perform (without help)at least two activities of daily living forat least 90 days due to a loss of func-tional capacity,

2) Having a level of disability similar to thatdescribed in (1), or

3) Requiring substantial supervision to pro-tect the individual from threats to healthand safety because of severe cognitiveimpairment.

Exclusion limited. If the insured was achronically ill individual, your exclusion of ac-celerated death benefits is limited to the costyou incurred in providing qualified long-termcare services for the insured. In determiningthe cost incurred do not include amounts paidor reimbursed by insurance or otherwise.Subject to certain limits, you can excludepayments received on a periodic basis with-out regard to your costs.

Insurance received in installments. If, be-cause of the death of the insured, you willreceive life insurance proceeds in install-ments, you can exclude a part of each in-stallment from your income.

The part of each installment you can ex-clude is the amount held by the insurancecompany (generally, the total lump sum pay-able at the insured's death) divided by the

number of periods in which the installmentsare to be paid. Amounts you receive that aremore than the excludable part must be in-cluded in your income as interest income.

Specified number of installments. Ifyou will receive a specified number of install-ments under the insurance contract, figure thepart of each installment you can exclude bydividing the amount held by the insurancecompany by the number of installments towhich you are entitled. A secondary benefi-ciary, in case you die before you receive allof the installments, is entitled to the sameexclusion.

Example. As beneficiary, you choose toreceive $40,000 of life insurance proceeds in10 annual installments of $6,000. Each year,you can exclude from your gross income$4,000 ($40,000 10) as a return of principal.The balance of the installment, $2,000, istaxable as interest income.

Specified amount payable. If each in-stallment you receive under the insurancecontract is a specific amount based on aguaranteed rate of interest, but the numberof installments you will receive is uncertain,the part of each installment that you can ex-clude from income is the amount held by the

insurance company divided by the number ofinstallments necessary to use up the principaland guaranteed interest in the contract.

Example. The face amount of the policyis $150,000, and as beneficiary you chooseto receive monthly installments of $1,250. Theinsurer's settlement option guarantees youthis payment for 240 months based on aguaranteed rate of interest. It also providesthat interest that is more than the guaranteemay be credited to the principal balance ac-cording to the insurer's earnings. Theexcludable part of each guaranteed install-ment is $625 ($150,000 240), or $7,500 foran entire year. The balance of each guaran-teed installment, $625 (or $7,500 for a year),is income to you. The full amount of any ad-

ditional payment for interest is income to you.

Installments for life. If, as the benefi-ciary under an insurance contract, you willreceive the proceeds in installments for therest of your life without a refund or certainguaranteed period, the part of each annualinstallment that you can exclude from incomeis the amount held by the insurance company,divided by your life expectancy. If the contractprovides for a refund or guaranteed pay-ments, the amount held by the insurancecompany for this calculation is reduced by theactuarial value of the refund or the guaran-teed payments.

Example. As beneficiary, you choose toreceive the $50,000 proceeds from a life in-surance contract under a life-income-with-cash-refund option. You are guaranteed$2,700 a year for the rest of your life (whichis estimated by use of mortality tables to be25 years from the insured's death). Theactuarial