US Internal Revenue Service: p559--2000

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Contents

Important Change .............................. 2

Important Reminders ......................... 2

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

Personal Representative ................... 2

Duties .............................................. 2

Fees Received by PersonalRepresentatives ....................... 3

Final Return for Decedent ................. 3

Filing Requirements ........................ 4

Income To Include .......................... 4

Exemptions and Deductions ........... 5

Credits, Other Taxes, andPayments ................................. 6

Name, Address, and Signature ...... 7

When and Where To File ............... 7

Tax Forgiveness for Deaths Due toMilitary or Terroristic Actions ... 7

Filing Reminders ............................. 8

Other Tax Information ....................... 8Tax Benefits for Survivors .............. 8

Income in Respect of the Decedent 8

Deductions in Respect of theDecedent .................................. 11

Estate Tax Deduction ..................... 11

Gifts, Insurance, and Inheritances .. 11

Other Items of Income .................... 13

Income Tax Return of anEstateForm 1041 ...................... 14

Filing Requirements ........................ 14

Income To Include .......................... 15

Exemption and Deductions ............. 16

Credits, Tax, and Payments ........... 18

Name, Address, and Signature ...... 19

When and Where To File ............... 19

Distributions to Beneficiaries Froman Estate ...................................... 19

Income That Must Be DistributedCurrently .................................. 19

Other Amounts Distributed ............. 19

Discharge of a Legal Obligation ..... 20

Character of Distributions ............... 20

How and When To Report .............. 20

Special Rules for Distributions ....... 21

Termination of Estate ..................... 22

Form 706 ............................................. 22

Comprehensive Example .................. 23

Final Return for Decedent .............. 23

Income Tax Return of anEstateForm 1041 .................. 24

How To Get Tax Help ......................... 25

Checklist of Forms and Due Dates .. 38

Worksheet To Reconcile AmountsReported ....................................... 39

Index .................................................... 40

Departmentof theTreasury

InternalRevenueService

Publica tion 55 9Cat. No. 15107U

Survivors,Executors, andAdministrators

For use in preparing

2000 Returns


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Important Change

Photographs of missing children. TheInternal Revenue Service is a proud partnerwith the National Center for Missing and Ex-ploited Children. Photographs of missingchildren selected by the Center may appearin this publication on pages that would other-wise be blank. You can help bring thesechildren home by looking at the photographsand calling 1800THELOST (18008435678) if you recognize a child.

Important Reminders

Combat zone. Special rules apply if amember of the Armed Forces of the UnitedStates dies while in active service in a combatzone or from wounds, disease, or injury in-curred in a combat zone. A qualified hazard-ous duty area is treated as a combat zone.See Publication 3, Armed Forces' Tax Guide.

Education IRA. Generally, the balance inan education individual retirement account

(education IRA) must be distributed within 30days after the individual for whom the accountwas established reaches age 30, or dies,whichever is earlier. The treatment of the ed-ucation IRA at the death of an individual un-der age 30 depends on who acquires the in-terest in the account. If the decedent'sspouse or other family member is the desig-nated beneficiary, the education IRA be-comes that person's education IRA. If anotherperson acquires the interest, that persongenerally must include in gross income theearnings portion of the distribution. If the de-cedent's estate acquires the interest, theearnings on the account must be included onthe final income tax return of the decedent.

For more information on education IRAs,

see Publication 590, Individual RetirementArrangements (IRAs) (Including Roth IRAsand Education IRAs).

Roth IRA. If a Roth IRA owner withdrew anamount from a traditional IRA in 1998 andconverted it to the Roth IRA, any amount theowner had to include in income as a resultof the withdrawal was included ratably overthe 4-year period beginning with 1998, unlessthe owner elected to report the full amount in1998. If the owner dies during that 4-yearperiod, any amount not previously reportedmust be included on the decedent's final re-turn unless the owner's surviving spouse re-ceives the entire interest in all the owner'sRoth IRAs and chooses to continue reportingit ratably. For more information, see Roth IRAunder Final Return for Decedent.

Medical savings accounts. The treatmentof a medical savings account (MSA), includ-ing a Medicare+Choice 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 is

included on the final income tax return of thedecedent.

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.

Individual taxpayer identification number(ITIN). The IRS will issue an ITIN to a non-resident or resident alien who does not have

and is not eligible to get a social securitynumber (SSN). To apply for an ITIN, file FormW7, Application for IRS Individual TaxpayerIdentification Number, with the IRS. It usuallytakes 30 days to get 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 (decedent). It shows them howto complete and file federal income tax re-

turns and points out their responsibility to payany taxes due.A comprehensive example, using tax

forms, is included near the end of this publi-cation. Also included at the end of this publi-cation are the following items.

A checklist of the forms you may needand their due dates.

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.

Comments and suggestions. We welcomeyour comments about this publication andyour suggestions for future editions.

You can e-mail us while visiting our website at www.irs.gov/help/email2.html.

You can write to us at the following ad-dress:

Internal Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NWWashington, DC 20224

We respond to many letters by telephone.Therefore, it would be helpful if you wouldinclude your daytime phone number, includ-

ing the area code, in your correspondence.

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 Tax Help near the endof this publication for information about get-ting publications and forms.

PersonalRepresentativeA personal representative of an estate isan 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 term

executor 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 mustperform the following duties.

File any income tax return and the estatetax return when due.

Pay the tax determined up to the date ofdischarge from duties.

Other duties of the personal representative infederal tax matters are discussed in othersections of this publication. If any beneficiaryis a nonresident alien, see 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 (EIN) for theestate. You should apply for this number as

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soon as possible because you need to enterit on returns, statements, and other docu-ments that you file concerning the estate. Youmust also give the number to payers of inter-est and dividends and other payers who mustfile a return concerning the estate. You mustapply for the number using Form SS4, Ap-plication for Employer Identification Number.Generally, it takes about 4 weeks to get yourEIN. However, you can apply by phone andget it immediately (you still need Form SS4).See the form instructions for how to apply.

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 EIN number must be pro-vided to the payer and used to report the in-terest on Form 1099INT, Interest Income. Ifthe interest is payable to a surviving jointowner, the survivor's identification numbermust be provided to the payer and used toreport the interest.

The deceased individual's identifying

number 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 EIN onany return, statement, or other document, youare liable for a penalty for each failure, unlessyou can show reasonable cause. You arealso liable for a penalty if you do not give theEIN to another person, or if you do not includethe taxpayer identification number of anotherperson on a return, statement, or other doc-ument.

Notice of fiduciary relationship. The term

fiduciary 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 in-structions and other requirements are givenon the back of the form.

Filing the notice. File the written notice(or Form 56) with the IRS office where thereturns are filed for the person (or estate) forwhom you are acting. You should file thisnotice as soon as all of the necessary infor-mation (including the EIN) is available. It

notifies the IRS that, as the fiduciary, you areassuming the powers, rights, duties, andprivileges of the decedent, and allows the IRSto mail to you all tax notices concerning theperson (or estate) you represent. The noticeremains in effect until you notify the appro-priate IRS office that your relationship to theestate has terminated.

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 furnish

satisfactory 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 your succes-sor.

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 you are making a requestfor prompt assessment under section 6501(d)of the Internal Revenue Code. You mustidentify the type of tax and the tax period forwhich the prompt assessment is requested.

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 of the de-cedent's taxes (other than federal estatetaxes) for any years for which the statutoryperiod for assessment is open. This applieseven though the returns 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 returns

for 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, theIRS 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 forDischarge from Personal Liability UnderInternal Revenue Code Section 6905, can beused for making this request. If Form 5495 isnot used, you must clearly indicate that therequest is for discharge from personal liabilityunder section 6905 of the Internal RevenueCode.

Insolvent estate. Generally, if a decedent'sestate is insufficient to pay all the decedent'sdebts, the debts due the United States mustbe paid first. Both the decedent's federal in-come tax liabilities at the time of death andthe estate's income tax liability are debts duethe United States. The personal represen-tative of an insolvent estate is personally re-sponsible for any tax liability of the decedentor of the estate if he or she had notice of suchtax obligations or had failed to exercise duecare in determining if such obligations existedbefore distribution of the estate's assets andbefore being discharged from duties. The ex-tent of such personal responsibility is theamount of any other payments made beforepaying the debts due the United States, ex-cept where such other debt paid has priorityover the debts due the United States. Theincome tax liabilities need not be formallyassessed for the personal representative tobe liable if he or she was aware or shouldhave been aware of their existence.

Fees Received byPersonal RepresentativesAll personal representatives must include intheir gross income fees paid to them from anestate. If paid to a professional executor oradministrator, self-employment tax also ap-plies to such fees. For a nonprofessional ex-ecutor or administrator (a person serving insuch capacity in an isolated instance, such

as a friend or relative of the decedent), self-employment tax only applies if a trade orbusiness 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, later.

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, 2000, before filing her 1999 taxreturn. Her personal representative must fileher 1999 return by April 17, 2000. Her finaltax return is due April 16, 2001.

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Filing RequirementsThe gross income, age, and filing status of adecedent generally determine whether a re-turn must be filed. Gross income usually isall income received by an individual in theform of money, goods, property and servicesthat is not tax-exempt. It includes gross re-ceipts from self-employment but if the busi-ness involves manufacturing, merchandising,or mining, subtract any cost of goods sold. Ingeneral, filing status depends on whether thedecedent was considered single or married

at 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 is filinga return for a decedent and claiming a refundmust file Form 1310, Statement of PersonClaiming Refund Due a Deceased Taxpayer,with the return. However, if the person claim-ing the refund is a surviving spouse filing a

joint return with the decedent, or a court-appointed or certified personal representativefiling an original return for the decedent, Form1310 is not needed. The personal represen-tative must attach to the return a copy of thecourt certificate showing that he or she wasappointed the personal representative.

Example. Assume that Mr. Green diedbefore filing his tax return. You were ap-pointed the personal representative for Mr.Green's estate, and you filed his Form 1040showing a refund due. You do not need Form

1310 to claim the refund if you attach a copyof 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 decedent can-not be filed if the surviving spouse remarriedbefore the end of the year of the decedent's

death. The filing status of the decedent in thisinstance is married filing 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 types

of income are reported on the final return.For more information about accounting

methods, see 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 areincluded 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 the

interest 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 closes the partner-ship's tax year for that partner. Generally, itdoes not close the partnership's tax year forthe remaining partners. The decedent's dis-tributive share of partnership items must befigured as if the partnership's tax year endedon the date the partner died. To avoid an in-terim closing of the partnership books, thepartners can agree to estimate the decedent'sdistributive share by prorating the amountsthe partner would have included for the entirepartnership tax year.

On the decedent's final return, include thedecedent's distributive share of partnershipitems for the following periods.

1) The partnership tax year which endedwithin or with the decedent's last tax year(the year ending on the date of death).

2) The period, if any, from the end of thatpartnership tax year (item (1)) to the de-cedent's date of death.

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, 2000, and her estate estab-lished its tax year ending August 31.

The distributive share of partnership itemsbased on the decedent's partnership interestis reported as follows.

Final Return for the Decedent January1 through August 31, 2000, includes XYZpartnership items from (a) the partnershiptax year ending June 30, 2000, and (b)the partnership tax year beginning July1, 2000, and ending August 31, 2000 (thedate of death).

Income Tax Return of the Estate September 1, 2000, through August 31,2001, includes XYZ partnership items forthe period September 1, 2000, throughJune 30, 2001.

S Corporation IncomeIf the decedent was a shareholder in an Scorporation, include on the final return thedecedent's share of the S corporation's itemsof income, loss, deduction, and credit for thefollowing periods.

1) The corporation's tax year that endedwithin or with the decedent's last tax year(year ending on the date of death).

2) The period, if any, from the end of thatcorporation's tax year (item (1)) to the

decedent's date of death.

Self-Employment IncomeInclude 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, the partnership's income or loss isconsidered to be earned ratably over thepartnership's tax year.

Community Income

If 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 yearby either the decedent or spouse may beconsidered to be the income and expensesof the other. For more information, see Pub-lication 555, Community Property.

Interest and Dividend Income(Forms 1099)A Form 1099 should be received for the de-cedent reporting interest and dividendsearned before death and included on the de-cedent's final return. A separate Form 1099should show the interest and dividends

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earned after the date of the decedent's deathand paid to the estate or other recipient,which must include those amounts on its re-turn. You can request corrected Forms 1099if these forms do not properly reflect the rightrecipient or amounts.

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-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.

See U.S. savings bonds acquired fromdecedent under Income in Respect of the

Decedent, later, for information on savingsbond interest that may have to be reportedon the final return.

How to report. If you are preparing the de-cedent's final return and you have receiveda Form 1099INT for the decedent that in-cludes amounts belonging to the decedentand to another recipient (the decedent's es-tate or another beneficiary), report the totalinterest shown on Form 1099INT onSchedule 1 (Form 1040A) or on Schedule B(Form 1040). Next, enter a subtotal of the in-terest shown on Forms 1099, and the interestreportable from other sources for which youdid not receive Forms 1099. Show any in-

terest (including any interest you receive asa nominee) belonging to another recipientseparately and subtract it from the subtotal.Identify the amount of this adjustment asNominee Distribution or other appropriatedesignation.

Report dividend income for which you re-ceived a Form 1099DIV on the appropriateschedule using the same procedure.

Note. If the decedent received amountsas a nominee, you must give the actual ownera Form 1099, unless the owner is the dece-dent's spouse.

Medical Savings Account

The treatment of a medical savings account(MSA), including a Medicare+Choice MSA,at the death of the account holder dependson who acquires the interest in the account.If the decedent's estate acquires the interest,the fair market value of the assets in the ac-count on the date of death is included in grossincome on the decedent's final return. Theestate tax deduction, discussed later, doesnot apply to this amount.

If a beneficiary acquires the interest, seethe discussion under Income in Respect ofthe Decedent, later. For other information onMSAs, see Publication 969, Medical SavingsAccounts.

Education IRAGenerally, the balance in an education indi-vidual retirement account (education IRA)must be distributed within 30 days after theindividual for whom the account was estab-lished reaches age 30, or dies, whichever isearlier. The treatment of the education IRAat the death of an individual under age 30depends on who acquires the interest in theaccount. If the decedent's estate acquires theinterest, the earnings on the account must beincluded on the final income tax return of the

decedent. The estate tax deduction, dis-cussed later, does not apply to this amount.If a beneficiary acquires the interest, see thediscussion under Income in Respect of theDecedent, later.

For more information on education IRAs,see Publication 590.

Roth IRAThis discussion only applies if the decedent:

Withdrew an amount from a traditionalIRA in 1998,

Converted the amount to a Roth IRA, and

Included the taxable conversion amountin income over a 4-year period beginning

in 1998.

If the owner dies during that 4-year period,any amount not previously reported must beincluded on the decedent's final return. How-ever, if the decedent's spouse receives theentire interest in all the decedent's Roth IRAs,that spouse can choose to continue to includethe amounts in income ratably over the re-maining years in the 4-year period.

The spouse makes this choice by attach-ing a statement to his or her return (and to thedecedent's final return, if a joint return is notfiled). Include the following items on thestatement.

A statement that the surviving spouse

elects to continue to report the taxableportion from the decedent's 1998 RothIRA conversion over the remaining taxyears.

The names and social security numbersof the surviving spouse and the decedent.

The total taxable amount of the dece-dent's 1998 Roth IRA conversion from thedecedent's 1998 Form 8606, Nondeduct-ible IRAs.

The amount, if any, of previous taxabledistributions from Roth IRAs.

If the spouse makes this choice, the amountincludible under the 4-year rule for the yearof death is included on the decedent's finalreturn. After the year of death, the survivingspouse reports the same taxable IRA distri-bution as the decedent would have reported.

The choice cannot be made or changedafter the due date (including extensions) forfiling the spouse's tax return for the tax yearthat includes the decedent's date of death.However, if the surviving spouse timely filedhis or her return for the year without makingthe choice, the surviving spouse can stillmake the choice by filing an amended returnwithin six months of the due date of the return(excluding extensions). Attach the statementto the amended return and write Filed pur-suant to section 301.91002 on the state-ment. File the amended return at the sameaddress you filed the original return.

For information on Roth IRAs, see Publi-cation 590.

Accelerated Death BenefitsAccelerated death benefits are amounts re-ceived under a life insurance contract beforethe death of the insured individual. Thesebenefits also include amounts received on thesale or assignment of the contract to a viaticalsettlement provider.

Generally, if the decedent received accel-erated death benefits either on his or her own

life or on the life of another person, thosebenefits are not included in the decedent'sincome. This exclusion applies only if the in-sured was a terminally or chronically ill indi-vidual. For more information, see the dis-cussion under Gifts, Insurance, andInheritances under 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 the

decedent reported deductions on an accrualmethod). This section contains a detaileddiscussion of medical expenses because,under certain conditions, the tax treatmentcan be different for the medical expenses ofthe decedent. See Medical Expenses, later.

ExemptionsYou can claim the personal exemption for thedecedent on the final income tax return. If thedecedent was another person's dependent(i.e., a parent's), you cannot claim the per-sonal exemption on the decedent's final re-turn.

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, see Publication501.

Medical ExpensesMedical expenses paid before death by thedecedent are deductible, subject to limits, onthe final income tax return if deductions areitemized. This includes expenses for the de-cedent, as well as for the decedent's spouseand dependents.

CAUTION

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

tribution from any 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 1-yearperiod 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, if deductions are itemized,rather than on the federal estate tax return

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(Form 706). You can deduct expenses in-curred in the year of death on the final incometax return. You should file an amended return(Form 1040X) for medical expenses incurredin an earlier year, unless the statutory periodfor filing a claim for that year 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 attaching a statement, in dupli-cate, to the decedent's income tax return oramended return. The statement must statethat you have not claimed the amount as anestate tax deduction, and that the estatewaives the right to claim the amount as adeduction. This election applies only to ex-penses incurred for the decedent, not to ex-penses incurred to provide medical care fordependents.

Example. Richard Brown used the cashmethod of accounting and filed his income taxreturn on a calendar year basis. Mr. Browndied on June 1, 2000, after incurring $800 inmedical expenses. Of that amount, $500 wasincurred in 1999 and $300 was incurred in2000. Richard filed his 1999 income tax returnbefore April 15, 2000. The personal repre-sentative of the estate paid the entire $800liability in August 2000.

The personal representative may file anamended return (Form 1040X) for 1999claiming the $500 medical expense as a de-duction, subject to the 7.5% limit. The $300of expenses incurred in 2000 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 the

estate (Form 1041) for the year the re-imbursements are received. The reimburse-ments are also includible in the decedent'sgross estate.

Deduction for Losses

A 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 de-duct any unused net operating loss or capitalloss on 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 deductibleloss 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 money and the adjustedbasis of property that he or she contributedto the activity and certain amounts the indi-vidual borrowed for use in the activity. 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,see Publication 925, Passive Activity and At-Risk Rules.

Passive activity rules. A passive activity isany trade or business activity in which thetaxpayer does not materially participate. Todetermine material participation, see Publica-tion 925. Rental activities are also passive

activities regardless of the taxpayer's partici-pation, 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.

If a passive activity interest is transferredbecause a taxpayer dies, the accumulatedunused passive activity losses are allowedas a deduction against the decedent's incomein the year of death. Losses are allowed onlyto the extent they are greater than the excessof the transferee's (recipient of the interesttransferred) basis in the property over thedecedent's adjusted basis in the property im-mediately before death. The portion of thelosses that is equal to the excess is not al-lowed as a 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, seePublication 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, see 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, see Publication 524,Credit for the Elderly or the Disabled.

Child tax credit. If the decedent had a

qualifying child, you may be able to claim thechild tax credit on the decedent's final returneven though the return covers less than 12months. If the decedent had three or morequalifying children, you may be able to claimthe additional child tax credit and get a refundif the credit is more than the tax liability. Formore information, see your form instructions.

General business tax credit. The generalbusiness credit available to a taxpayer is lim-ited. Any unused credit arising in a tax yearbeginning before 1998 generally is carriedback 3 years and then carried forward for upto 15 years. Any unused credit arising in a taxyear beginning after 1997 has a 1-yearcarryback and a 20-year carryforward period.

After the carryforward period, a deductionmay be allowed for any unused businesscredit. If the taxpayer dies before the end ofthe carryforward period, the deduction gen-erally is allowed in the year of death.

For more information on the general busi-ness credit, see Publication 334, Tax Guidefor 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. Self-employment taxmay be owed on the final return if either of thefollowing applied to the decedent in the yearof death.

1) Net earnings from self-employment (ex-cluding income described in (2)) were$400 or more.

2) Wages from services performed as achurch employee were $108.28 or more.

Alternative minimum tax (AMT). The taxlaws give special treatment to some kinds ofincome and allow special deductions andcredits for some kinds of expenses. The al-ternative minimum tax (AMT) was enactedso that certain taxpayers who benefit from

these laws still pay at least a minimumamount of tax. In general, the AMT is the ex-cess of the tentative minimum tax over theregular 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.

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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 written

in 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.

If you pay someone to prepare, assist inpreparing, or review the tax return, that per-son must sign the return and fill in the otherblanks in the paid preparer's area of the re-turn. You can check a box in the signaturearea that authorizes the IRS to contact thatpaid preparer for certain information. See theForm 1040 instructions for more information.

When and Where To FileThe final income tax return is due at the sametime the decedent's return would have beendue had death not occurred. A final return fora decedent who was a calendar year taxpayeris generally due on April 15 following the yearof death, regardless of when during the yeardeath occurred. However, when the due datefalls on a Saturday, Sunday, or legal holiday,the due date is delayed until the next busi-ness day.

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

Generally, you must file the final incometax return of the decedent with the InternalRevenue Service center for the place whereyou live. A tax return for a decedent cannotbe electronically filed. A paper tax return mustbe filed for the decedent.

Tax Forgiveness forDeaths Due toMilitary or TerroristicActions

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 orterroristic 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 combat

zone 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 theArmed 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 Terroristic ActionsThe decedent's income tax liability is forgivenif, at death, he or she was a military or civilian

employee 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 terroristic 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 2000 because of wounds incurredwhile a U.S. employee outside the UnitedStates in a terroristic attack that occurred in

1989 will be forgiven for 2000 and for all priortax years in the period 19881999. Refundsare allowed for the tax years for which theperiod for filing a claim for refund has notended, as discussed later.

Military or terroristic action defined. Amilitary or terroristic action means the follow-ing.

Any terroristic activity that most of theevidence indicates was directed againstthe United States or any of its allies.

Any military action involving the U.S.Armed Forces and resulting from violenceor aggression against the United Statesor any of its allies, or the threat of 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.

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 filinga claim for credit or refund is 3 years after thereturn was filed or 2 years after the tax waspaid, 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. Form W2, Wage and Tax State-ment, must accompany all returns.

2) If a U.S. individual income tax return has

been 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 claimsat the following address:

Internal Revenue Service CenterP.O. Box 12267Attn: Stop 537Covington, KY 41012

Identify all returns and claims for refundby writing Kosovo Operation KIA, DesertStorm KIA, or Former Yugoslavia KIA in bold letters on the top of page 1 of thereturn or claim. On Forms 1040 and 1040X,the phrase Kosovo Operation KIA, De-sert Storm KIA, or Former Yugoslavia KIA must be written on the line for totaltax. If the individual was killed in a terroristicor military action outside the United States,put KITA on the front of the return and onthe line for total 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 and

the IRS will make the proper allocation.The following necessary documents

must accompany all returns and claims forrefund under these procedures.

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

A certification from the Department ofDefense or the Department of State thatthe death was due to military or terroristicaction 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, Report ofCasualty. For civilian employees of all

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other agencies, certification must be aletter signed by the Director General ofthe Foreign Service, Department of State,or his/her delegate. The certification mustinclude the individual's name and socialsecurity number, the date of injury, thedate of death, and a statement that theindividual died as the result of a militaryor terroristic action outside the UnitedStates and was an employee of theUnited States at the date of injury and atthe 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.Attach Form 1310 and a statement that youwill file an amended claim 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 thespouse would have been liable if a sep-

arate return had been filed.

3) Multiply the joint tax liability by a fraction.The numerator of the fraction is theamount in (1), above. The denominatorof the fraction is the total of (1) and (2).

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

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's

name, 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 survivingspouse in the area where you sign thereturn.

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, do

the following.

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 not

acceptable 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 attachForm 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.

Tax Benefits for SurvivorsSurvivors 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, later.

Decedent as your dependent. If the dece-dent qualified as your dependent for the partof the year before death, you can claim theexemption for the dependent on your tax re-turn, regardless of when death occurred dur-ing the year.

If the decedent was your qualifying child,you may be able to claim the child tax credit.

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.

You were entitled to file a joint return withyour spouse for the year of death whether or not you actually filed jointly.

You did not remarry before the end of thecurrent tax year.

You have a child, stepchild, or foster childwho qualifies as your dependent for thetax year.

You provide more than half the cost ofmaintaining your home, which is theprincipal residence of that child for theentire year except for temporary ab-sences.

Example. William Burns's wife died in1998. Mr. Burns has not remarried and cont-inued throughout 1999 and 2000 to maintaina home for himself and his dependent child.For 1998 he was entitled to file a joint returnfor himself and his deceased wife. For 1999and 2000, he qualifies to file as a Qualifying

widow(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 representativeis 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 one of the fol-lowing.

The decedent's estate, if the estate re-ceives it.

The beneficiary, if the right to income ispassed directly to the beneficiary and thebeneficiary receives it.

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

TIPIf you have to include income in re-spect of the decedent in your grossincome, you may be able to claim a

deduction for the estate tax paid on that in-come. SeeEstate Tax Deduction, later.

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 factoryfor $2,000, but did not receive payment be-fore his death. The proceeds from the saleare income in respect of the decedent. Whenthe estate was settled, payment had not beenmade and the estate transferred the right tothe payment to his widow. When Frank's

widow collects the $2,000, she must includethat amount in her return. It is not reportedon the final return of the decedent nor on thereturn of the estate.

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.

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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 collecting

two installments, distributed the right to theremaining installments to you, the beneficiary.The payments are income in respect of thedecedent. None of the payments wereincludible on Cathy's final return. The estatemust include in its gross income the two in-stallments it received, and you must includein your gross income each of the three in-stallments as you receive 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 you

received the rest. The commissions are in-come in respect of the decedent. None ofthese commissions were includible in yourfather's final return. The commissions re-ceived by your mother were included in hergross income. The commissions you receivedare not includible in your mother's gross in-come, even on her final return. You must in-clude them in your income.

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 ofthe obligation. See Installment obligations,later.

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 wouldhave included had death not occurred. Formore information, see Publication 537, In-stallment 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 Form1099MISC and give the recipient a copy ofthe form or a similar statement.

Wages paid as income in respect of adecedent 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. These wages are not includedin box 1 of Form W2.

Wages paid as income in respect of adecedent after the year of death generally arenot subject to withholding for any federaltaxes.

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 rental period,only the proceeds from the portion of therental period ending with death are income inrespect of a decedent. The proceeds from the

portion of the rental period from the day afterdeath to the end of the rental period are in-come to the estate. Cash rent or crop sharesand livestock received as rent and reducedto cash by the decedent are includible in thefinal return even though the rental period didnot end until after death.

Example. Alonzo Roberts, who used thecash method of accounting, leased part of hisfarm for a 1-year period beginning March 1.The rental was one-third of the crop, payablein cash when the crop share is sold at the

direction 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. If the partner who diedhad been receiving payments representing adistributive share or guaranteed payment inliquidation of the partner's interest in a part-nership, the remaining payments made to theestate or other successor in interest are in-come in respect of the decedent. The estateor the successor receiving the payments must

include them in gross income when received.Similarly, the estate or other successor in in-terest receives income in respect of a dece-dent if amounts are paid by a third person inexchange for the successor's right to the fu-ture payments.

For a discussion of partnership rules, seePublication 541, Partnerships.

U.S. savings bonds acquired from dece-dent. If series EE or series I U.S. savingsbonds that were owned by a cash methodindividual who had chosen to report the in-terest each year (or by an accrual methodindividual) are transferred because of death,the increase in value of the bonds (interestearned) in the year of death up to the date

of death must be reported on the decedent'sfinal return. The transferee (estate or benefi-ciary) reports on its return only the interestearned after the date of death.

The redemption values of U.S. savingsbonds generally are available from localbanks, savings and loan institutions, or yournearest Federal Reserve Bank.

You also can get information by writing tothe following address.

Bureau of the Public DebtP.O. Box 1328Parkersburg, WV 261061328

Or, on the Internet, visit the followingsite.www.publicdebt.treas.gov

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) then

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includes in its return only the interestearned after the date of death.

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 chosen

to 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 seriesEE 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 youruncle'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, you

would report $406 ($500 $94) as interestwhen you cashed the bond at maturity. Sincethis $406 represents the interest earned afteryour uncle's death and was not included inhis estate, no deduction for federal estate taxis 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 beneficiaryon these bonds. Your uncle used the cashmethod of accounting and had not chosen toreport the increase in redemption price of theseries EE bonds each year as it accrued.Your uncle's personal representative madeno election to include any interest earnedbefore death in the decedent's final return.

Your income in respect of the decedent is thesum of the unreported increase in value of theseries EE bonds, which constituted part of theamount paid for series HH bonds, and theinterest, if any, payable on the series HHbonds but not received as of the date of thedecedent's death.

Specific dollar amount legacy satisfiedby transfer of bonds. If you receive seriesEE or series I bonds from an estate in satis-faction of a specific dollar amount legacy andthe decedent was a cash method taxpayerwho did not elect to report interest each year,only the interest earned after you receive thebonds is your income. The interest earned tothe date of death plus any further interest

earned to the date of distribution is income to(and reportable by) the estate.

Cashing U.S. savings bonds. When youcash a U.S. savings bond that you acquiredfrom a decedent, the bank or other payer thatredeems it must give you a Form 1099INTif the interest part of the payment you receiveis $10 or more. Your Form 1099INT shouldshow the difference between the amount re-ceived and the cost of the bond. The interestshown on your Form 1099INT will not bereduced by any interest reported by the de-cedent before death, or, if elected, by thepersonal representative on the final incometax return of the decedent, or by the estateon the estate's income tax return. Your Form1099INT may show more interest than youmust include in your income.

You must make an adjustment on your taxreturn to report the correct amount of interest.See 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 yearthe 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 inrespect 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 a traditional IRAor a Roth IRA he or she inherited, all or someof it may be taxable. The distribution is taxa-ble in the year received as income in respectof a decedent up to the decedent's taxablebalance. This is the decedent's balance at thetime of death, including unrealized appreci-ation and income accrued to date of death,minus any basis (nondeductible contribu-tions). Amounts distributed that are more thanthe decedent's entire IRA balance (includestaxable and nontaxable amounts) at the timeof death are the income of the beneficiary.See Roth IRA, next, for determining taxabilityof Roth IRA distributions.

If the beneficiary of a traditional IRA is thedecedent's surviving spouse and that spouseproperly rolls over the distribution into another

traditional IRA or to a Roth IRA, the distribu-tion is not currently taxed.

Example 1. At the time of his death, Gregowned a traditional IRA. All of the contribu-tions by Greg to the IRA had been deductiblecontributions. Greg's nephew, Mark, was thesole beneficiary of the IRA. The entire bal-ance of the IRA, including income accruingbefore and after Greg's death, was distributedto Mark in a lump sum. Mark must include thetotal amount received in his gross income.The portion of the lump-sum distribution that

equals the amount of the balance in the IRAat Greg's death, including the income earnedbefore death, is income in respect of the de-cedent. Mark may take a deduction for anyfederal estate taxes that were paid on theportion of the IRA that is income in respectof the decedent.

Example 2. Assume the same facts asin Example 1, except some of Greg's contri-butions to the IRA had been nondeductiblecontributions. To determine the amount toinclude in gross income, Mark must subtractthe total nondeductible contributions made byGreg from the total amount received (includ-ing the income that was earned in the IRAboth before and after Greg's death). Incomein respect of the decedent is the total amountincluded in gross income less the incomeearned after Greg's death.

For more information on inherited IRAs,see Publication 590.

Roth IRA. Qualified distributions from a RothIRA are not subject to tax. A distribution madeto a beneficiary or to the Roth IRA owner'sestate on or after the date of death is a qual-ified distribution if it is made after the5-taxable-year period beginning with the firsttax year in which a contribution was made toany Roth IRA of the owner.

CAUTION

!A distribution cannot be a qualifieddistribution unless it is made after

2002.

Generally, the entire interest in the RothIRA must be distributed by the end of the fifthcalendar year after the year of the owner'sdeath unless the interest is payable to adesignated beneficiary over his or her life orlife expectancy. If paid as an annuity, thedistributions must begin before the end of thecalendar year following the year of death. Ifthe sole beneficiary is the decedent's spouse,the spouse can delay the distributions untilthe decedent would have reached age 701/2or can treat the Roth IRA as his or her ownRoth IRA.

A portion of a distribution to a beneficiarythat is not a qualified distribution may beincludible in the beneficiary's gross income.Generally, the portion includible is theearnings in the decedent's Roth IRAs.Earnings attributable to the period ending withthe decedent's date of death are income inrespect of the decedent. Additional taxableamounts are the income of the beneficiary.

For more information on Roth IRAs, seePublication 590.

Education IRA. Generally, the balance inan education individual retirement account(education IRA) must be distributed within 30days after the individual for whom the accountwas established reaches age 30 or dies,whichever is earlier. The treatment of the ed-ucation IRA at the death of an individual un-

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der age 30 depends on who acquires the in-terest in the account. If the decedent's estateacquires the interest, see the discussion un-der Final Return for Decedent, earlier.

If the decedent's spouse or other familymember is the designated beneficiary of thedecedent's account, the education IRA be-comes that person's education IRA. It is sub-

ject to the rules discussed in Publication 590.Any other beneficiary (including a spouse

or family member that is not the designatedbeneficiary) must include in gross income theearnings portion of the distribution. The dis-tribution must be made within 30 days. Anybalance remaining at the close of the 30-dayperiod is deemed to be distributed at thattime. The amount included in gross incomeis reduced by any qualified higher educationexpenses of the decedent that are paid by thebeneficiary within 1 year after the decedent'sdate of death. An estate tax deduction, dis-cussed later, applies to the amount includedin income by a beneficiary other than the de-cedent's spouse or family member.

Medical savings account (MSA). Thetreatment of an MSA, including a Medicare+Choice MSA, at the death of the accountholder depends on who acquires the interestin the account. If the decedent's estate ac-

quired the interest, see the discussion underFinal 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 estate

tax 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 as a deduction when paid to one of thefollowing.

The estate.

The person who acquired an interest inthe decedent's property (subject to suchobligations) because of the decedent'sdeath, if the estate was not liable for theobligation.

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 receives income inrespect of the decedent to which the de-duction relates, whether or not that personreceives the property from which the income

is 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.If the 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 to anyone else.

For more information about depletion, seechapter 10 in Publication 535, Business Ex-penses.

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). How-ever, an income tax deduction is allowed tothe recipient for the estate tax paid on theincome.

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, on line 27 ofSchedule A (Form 1040). This deduction isnotsubject to the 2% limit on miscellaneousitemized deductions. Estates can claim thededuction on the line provided for the de-duction on Form 1041. For the alternativeminimum tax computation, the deduction isnot included in the itemized deductions thatare an adjustment to taxable income.

If the income in respect of the decedentis capital gain income, you must reduce thegain, but not below zero, by any deduction forestate tax paid on such gain. This applies infiguring the following.

The maximum tax on net capital gain.

The 50% exclusion for gain on smallbusiness stock.

The limitation on capital losses.

ComputationTo figure a recipient's estate tax 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 is thetax on the taxable estate, reduced by any

credits 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 respectof 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 used the cashmethod of accounting. At the time of hisdeath, he was entitled to receive $12,000from clients for his services and he had ac-crued bond interest of $8,000, for a total in-come in respect of the decedent of $20,000.

He also owed $5,000 for business expensesfor which his estate is liable. The income andexpenses are reported on Jack's estate taxreturn.

The tax on Jack's estate is $9,460 aftercredits. The net value of the items includedas income in respect of the decedent is$15,000 ($20,000 $5,000). The estate taxdetermined without including the $15,000 inthe taxable estate is $4,840, after credits. Theestate tax that qualifies for the deduction is$4,620 ($9,460 $4,840).

Recipient's deductible part. Figure the re-cipient's part of the deductible estate tax bydividing the estate tax value of the items ofincome in respect of the decedent included inthe recipient's gross income (the numerator)by the total value of all items included in theestate that represents income in respect ofthe decedent (the denominator). If the amountincluded in the recipient's gross income isless than the estate tax value of the item, usethe lesser amount in the numerator.

Example 2. As the beneficiary of Jack'sestate (Example 1), you collect the $12,000accounts

Documents

US Internal Revenue Service: p559--2000