Plan to file return after parent's death

Tax Talk

Tax Talk

February 20, 2007

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax-advice column featuring three experts from the Hunt Valley accounting firm SC&H Group.

My mother died in March 2006, and I was her personal representative. I filed her 2005 individual tax forms in April 2006 and marked them deceased taxpayer. Her estate was closed in the same year, and a Form 1041 was filed. I have recently received 1099 forms for pension payments, interest and dividends for 2006. Some of these amounts were included on her estate tax form; do I need to file a 1040 for her? These forms total about $11,000 but include amounts received after her death.

- Jacki, Catonsville

You might want to file the return just to clear it off the IRS files. The IRS will probably be expecting a return to be filed. However, you should make any adjustments to the return for any income reported by the estate. Any income received until the date of death should be reported on your mother's 2006 individual income tax return. This would include any interest, dividends, pension payments or other sources of income received from Jan. 1, 2006, through the date of death. Filing the decedent's final individual income tax return should be coordinated with the estate's fiduciary income tax return. I would recommend having the same person prepare both returns since they need to work in unison. Often income is reported in total on one return, with a separate line subtracting from the return the income reported by the estate or other tax entity.

Dealing with income and estate taxes for a decedent is complex, and we recommend that you seek further guidance from a professional.

My 23-year-old daughter started a Roth IRA on June 4, 2003. She contributed sporadically over the years and cashed out her Roth IRA on Feb. 10, 2006. She received a 1099-R indicating a gross distribution in Box 1 but nothing in Box 2a (taxable amount). Am I to understand that because there is no taxable amount that I do not have to report the gross distribution on her tax return?

- Joseph, Baltimore

Generally, when Box 2a on a 1099-R is left blank, the taxable amount of the distribution has not been determined. Unfortunately for your daughter, a portion of the distribution may have to be included in income. Because your daughter did not hold the IRA for five years, the distribution is not a qualified distribution, and therefore she loses many of the benefits of the Roth IRA. In your daughter's case, the amount by which the distribution exceeds her Roth IRA contributions should be included in income. In addition, the distribution will be subject to a 10 percent early withdrawal penalty, unless limited exceptions apply.

I am 15 and earned less than $1,000 on my W2. Should I file taxes this year, and if so, how?

-Priscilla, Brookeville

If your $1,000 W-2 represents the only income you received in 2006 and you are a dependent, then you are not required to file a tax return. The general rule is that dependent children are not required to file a tax return if they have $5,150 or less of earned income (i.e. W-2 income). However, you might consider filing a tax return to get a refund if you had any federal or state taxes withheld.

If my business gets a refund of federal telephone excise tax, is that taxable income to us next year? Is it taxable now if we file on the accrual method?

- Zeke, Sparks

The refund of federal telephone excise tax will be taxable income to you. Any refund a business receives on an item that was previously deducted as an expense will be taxable income. The telephone excise tax was a line item on your telephone bills, so a deduction was taken for the expenses paid related to telephone service in previous years. As an accrual basis taxpayer, the telephone excise tax refund should be accrued.

NEED HELP WITH YOUR TAXES? To submit a question to the "Tax Talk" experts, go to baltimoresun.com/taxtalk

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