How do I deal with Bonus from deceased spouse's employer in year I can't count them on my taxes?

[CindyKR]

My spouse died in Fall 2022. I filed my taxes for that year as joint. Then, in 2023, I received an unexpected check for a small annual bonus from their employer. It is my understanding that I cannot file joint on my 2023 taxes because I do not have dependents and am not eligible for SS benefits yet. So, since I can't have them joint, how will I report their income? I use TurboTax, of course.

[Opus 17 · Accepted solution]

This is a situation known as "income in respect of a decedent."  See IRS publication 559.

https://www.irs.gov/forms-pubs/about-publication-559

https://www.irs.gov/publications/p559#en_US_2022_publink100099595

If there is not an open estate, and if you are your spouse's beneficiary or otherwise the person legally entitled to their property, then you report the income on your tax return in your name.  You would file single as normal (or as qualifying surviving spouse** if you have a dependent child).   (**This used to be called "qualifying widow" and is still called that on a lot of web sites.)

Note that the employer should issue a 1099-MISC, and not a W-2.  Because the bonus was paid in the year after your spouse died, it is not supposed to be subject to medicare or social security tax.  

[CindyKR]

I am surprised that it won't have SS or medicare tax applied. Good to know about the 1099-Misc! That is helpful. I suspected that is how I would need to handle it, but am very grateful for your expert confirmation and additional information. Thanks so much!

[CindyKR]

When TurboTax asks me the reason for the 1099-MISC, what do I say? It is wanting to know if it is work-related. I don't know what to say because it was related to my deceased husband's work, but not mine. Do I say, "2022 bonus received in 2023 from deceased husband's employer"? Or is there something simpler to say? 

[CindyKR]

Do I answer "yes" or "no" to the TT question "does this 'bonus' involve an intent to earn money?"?

[dmertz]

The Form 1099-MISC should have been issued to your spouse's estate, not to you, so you should not have a From 1099-MISC to enter into TurboTax when preparing your individual tax return.  If the amount of income to the estate is more than $600 during the estate's income tax year, the estate must file Form 1041 where this income would be included.  The estate would then pass this income through to you on Schedule K-1 (Form 1041) which you would include on your tax return for the year that contains the end date of the estate's tax year.

[Opus 17]

This is "income in respect of a decedent" and, while an argument could be made that the money should have been issued to the estate, I don't think that is the only option, otherwise "income in respect of a decedent" wouldn't be a separate thing with its own rules.

@CindyKR  This is "other income" to you.  On your tax return, this is not income earned from working or from an intent to work, because it was not your work or intent to work, and the money is going on your tax return.  You should not generate a schedule C and you should not pay self-employment tax.  

[CindyKR]

I just got the tax form for the bonus for my spouse. Unfortunately, they reported it on a W-2 in my spouse's name. Now what?

[AbrahamT]

1. The income should be reported as "Other income" by you.
2. His employer shouldn't have issued a W-2, it should have been a 1099-MISC.
3. His employer shouldn't have withheld any taxes. If there were any taxes withholding, you should reclaim it from the employer.
4.  Ask his employer to reissue a 1099MISC instead. If he refuses to do so, hold onto this W2 so that if an issue arises in the future, it can be explained.

      Finally, to enter this in TT, Go into Wages & Income, scroll down to the bottom where it says Misc. Income,        than scroll down to the bottom where it says "Other reportable income", type in the description "Bonus 

      Income with the amount. 

     [Edited 01/29/2024|1:50 pm PST]

[Opus 17]

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@CindyKR wrote:

I just got the tax form for the bonus for my spouse. Unfortunately, they reported it on a W-2 in my spouse's name. Now what?

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This situation is covered in IRS Revenue Ruling 64-150.  Since the "64" means 1964, it;s not online at the IRS web site, but it is online here.

https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/rev-rul-64-150/d47j

Here are two lawyer blog posts discussing the issue.

https://www.employerslawyersblog.com/2016/09/tax-reporting-for-deferred-compensation-payments-follow...

https://kahnlitwin.com/blogs/tax-blog/how-do-you-report-deferred-compensation-when-an-employee-dies

Your next step is to contact the employer and ask that the W-2 be canceled and ask for a 1099-MISC.  Point out the revenue ruling and the fact that they save on social security and medicare tax too.  Keep your correspondence in writing and keep copies.

If they refuse to correct the problem, your federal and state income tax will be the same either way, but you are being cheated out of the social security and medicare withholding that should not have been made.   You can report the income as if it was on a 1099-MISC in turbotax.  Make sure to include any federal tax that was withheld (from box 2 of the W-2, goes into box 4 of the 1099-MISC) and state tax withheld (from box 17 of the W-2, goes into box 16 of the 1099-MISC).

If the IRS sends a letter asking about the W-2, reply by telling the story (bonus paid in the year after death) and include copies of your correspondence, and explain that you included the income as "other income" on your tax return following the rules for "Income in respect of a decedent."

Then, to get a refund of the mistakenly withheld social security and medicare tax, you will need to file form 843.  Again, include your story, copy of the death certificate, copy of the bonus check or deposit showing it was paid in the following calendar year, correspondence with the employer, etc.

https://www.irs.gov/forms-pubs/about-form-843 

[ee-ea]

Deleted

[CindyKR]

This just complicated fast. I now see that my spouse's last paycheck also was not reported on the correct form since it was included on the W-2 with all the other wages, but it came after death. So, it, too, should have been reported on a 1099-MISC. But, I already filed those taxes last year. Can I still do something about that? Do I need to get the employer to do something for the 2022 income and file an amended return or something?

I also don't see that TT filed a 1041. It was a 1040-SR, I guess because my spouse was 65. We had a revokable trust together, married many decades, and live in AR. I got everything. So, was I supposed to file a 1041?

[Opus 17]

@CindyKR 

So let's go back up top.

Wages earned and paid in the year the person died are reported on a w-2 and are subject to social security and medicare tax, even if the person died before the paycheck was received.

Wages that were earned before a person died, but paid in the tax year after they died, are reported on 1099-MISC and are not subject to social security and medicare tax.

You originally reported your spouse died in 2022, so any wages or bonuses paid in 2022 are properly included in his 2022 W-2 and are reported on your joint 2022 tax return.  It is only the "small bonus" paid in 2023 that should be on a 1099-MISC. 

[CindyKR]

Also, I am trying to open a TT pdf to look at the 2022 tax return, and it keeps thinking I am going to a website it can't find. So, I tried to save another copy directly from TT, and it still thinks I'm going to a website. What is going on? I am on my spouse's Windows computer. I'm an Apple person. So maybe I haven't associated the correct app or something? What can I do to open a TT pdf on Windows?

[Opus 17]

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@CindyKR wrote:

Also, I am trying to open a TT pdf to look at the 2022 tax return, and it keeps thinking I am going to a website it can't find. So, I tried to save another copy directly from TT, and it still thinks I'm going to a website. What is going on? I am on my spouse's Windows computer. I'm an Apple person. So maybe I haven't associated the correct app or something? What can I do to open a TT pdf on Windows?

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Not sure on this one.  You need to download the PDF to a local file.  Once downloaded as a local file with type "PDF", it should open in Acrobat or whatever built-in viewer Windows has.  If you download the tax date file (file type is .tax2022) then it won't open anywhere unless you have Turbotax 2022 desktop version installed on your PC.  

You're in Turbotax Online, trying to download last year's return as a PDF?

@Critter-3 

@VolvoGirl 

Can you help with this one?