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March 7, 2017

What You Need to Know About Taxes Associated with the Death of a Loved One

Greenville SC estate planning lawyer

When you lose a loved one, you face the grief and the changes associated with that loss, which can be challenging to cope with before you even think about the associated tax concerns. Yet, you will need to address these concerns, and the more information you have, the easier it will be to do so with the least amount of undue stress.

There Are No State Estate or Inheritance Taxes in South Carolina

One good thing about living in South Carolina is that you won’t have to deal with the concerns associated with paying state estate taxes or inheritance taxes. Certain states do have these tax issues for those who owned property in the state before their death and for those who inherit property from someone who has passed away in the state. South Carolina does not, so this, at least, is something you probably don’t have to stress over.

Unfortunately, if your loved one lived and died in a different state, then you may need to deal with these issues, assuming that you received an inheritance. If you are surviving spouse, then this should not apply to you. In some cases, if the inheritance is small, then you might be exempt from the associated inheritance taxes. In other cases, you will receive a bill in the mail from the state where your loved one passed away when you receive an inheritance. The tax bill will be based on the value of your inheritance.

Of course, South Carolina is subject to federal laws that apply to the whole of the US. Yet, this is not likely to apply to your case unless the inheritance was a very substantial amount, like millions of dollars of assets. Out of every one thousand estates, two will have to pay estate taxes to the federal government. The exemption is around $5.45M, so if your inheritance is greater than this, you will likely have to pay this estate tax.

Further, it is helpful to know that the IRS does not consider inheritances to be typical income, so it is not taxed as income, unless it is a retirement account and you withdraw the assets. In these cases, the inherited asset is taxed as income by the IRS.

What Tax Returns Will You Have to File After the Death of a Loved One?

When someone passes away, there is going to be a personal representative, executor (in cases of probate), or trustee (if there is a trust) who will be responsible for distributing the assets and properties and paying any taxes that are associated with the estate. There are three different tax returns on the federal level that you’ll need to consider (though you won’t have to file all three). Then there are state estate and trust income taxes and state inheritance taxes for some states. Again, you don’t have to worry about these state taxes in South Carolina unless you inherited from someone who owned assets in another state that does apply these taxes.

Such taxes are going to be paid from the assets of the deceased, rather than the deceased person’s heirs and beneficiaries. The only exception is the cases where the surviving spouse is the heir/beneficiary, in which case, this person will likely be paying the taxes. Until all taxes have been paid, the beneficiaries and heirs cannot receive their inheritance. If you are the personal representative of the deceased, then you could face liability for these taxes, so it is important to be completely sure that everything is taken care of before distributing assets. A South Carolina estate attorney like those at the Anderson Law Firm can help.

It is also important to be aware of the deadlines for these federal and state income tax returns, which is the 15th of April in the year that follows the death of the person. The fact that you have until the following year is a good thing, because it keeps you from having to face these issues within weeks or months of the death, while you are likely to still be in the depths of your grief.

If the person who passed away was your spouse, then you can still file as married filing jointly for the year that the person died. If the individual earned the minimum income amount, as set yearly by federal laws and state laws, then a tax return will have to be filed on their behalf by the 15th of April in the year following their death.

It is also important to be aware that the trust or the estate is separate from the deceased as a tax payer, and will need a tax identification number of its own to file the taxes correctly. If someone had their assets in a living trust, then whomever is identified as the trustee will have to a tax identification number for that trust in order to file a trust tax return. You may have to do this more than once, depending on how long it takes to distribute the assets. This is something that the trustee has to take care of each year until the distribution of assets is completed.

However, in cases where the deceased person’s estate is distributed by a will, the assets will go into probate, and there will be an executor. In such cases, the tax identification number will be associated with the estate, and the returns will be due within the fourth month, following the end of the taxable year for the estate, instead of on the usual 15th of April deadline.

When it comes to federal estate tax returns, associated with those estates that are valued greater than $5.45M, these are due within nine months of the death, though you can request an extension of six months. Contact the experienced South Carolina estate planning lawyer at the Anderson Law Firm for more information and help with the complex tax issues that may be associated with the estate of your deceased loved one.