Only income earned between the beginning of the year and the date of death should be reported on the final return.
For taxpayers who use the cash method of accounting, as most do, income is considered earned as it is actually received or at least made available to them. Taxpayers who use the accrual method of accounting, on the other hand, count income as earned when they actually earn it, regardless of when they receive it.
The distinction is important because some income that might logically seem to belong on the decedent's final return is considered income in respect of a decedent (defined below) and is taxable either to the estate or to the person who receives it.
Income in respect of a decedent refers to income that the decedent had a right to receive at the time of death, but that is not reported on his or her final return. It does not include earnings on savings or investments that accrue after death.
Say a taxpayer who has a substantial amount in money-market mutual funds dies on June 30th. Only interest earned up to that date would be reported on the final tax return. Earnings after that date are taxable to the beneficiary of the account, or to the estate. @Billl2021 I am sorry for your loss.
The IRS expects a final accounting, and it's up to the executor or survivors to file the paperwork. Here's what you need to know about the deceased's final tax return, reporting income and deductions, inheritance and more.
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