2023 Tax Year refunds from deceased person's final return, taxable in Tax Year 2024?

[davidsson]

Mom passed in August 2023.  This will be her final tax filing.

Because estimated payments were made and income was not as high as it otherwise would have been, I expect refunds of ~$9k federal and $4k state in 2024 for the 2023 tax year.

Is the federal refund at all taxable for the 2024 tax year?... 

 I assume not, but what do I know.

Is the state refund (entirely composed of unneeded estimated payments) at all taxable for the 2024 tax year?...

I assume there's a federal tax because of itemized deductions (not Standard) for 2023.  Will the refund be taxable to me, as executor, filing her taxes? Would I need to pay taxes on the full amount of the refund (as regular income)?

I am concerned because I am in a higher bracket than the deceased's return.

Is there a way to make (legal) adjustments on this years tax form for the deceased to somehow avoid 2024 taxes on the amount of the refund?

Thanks in advance!!!

[ThomasM125]

The federal refund would not be taxable in 2024. Since you probably deducted state income taxes paid in 2023 as part of the federal itemized deductions in that year, if you have a refund of state taxes, it will be taxable in 2024 to the extent it reduced your federal tax in 2023. It will be taxable to the estate of the deceased assuming an estate tax return is filed. It would be necessary if the income of the estate was more than $600 in 2024. The $600 of estate income refers to the gross income without factoring in estate expenses, so you would need to file an estate tax return if the state refund income plus any other estate income was over $600. If an estate tax return is not required, there would be no tax on the state tax refund.

I am sorry for your loss.

[davidsson]

Thank you for the quick and clear response.

To see the effect, I removed the estimated payment amount for 2023 ($3600 which is also the refund amount) from the state and local tax deduction spread sheet... resulting in a federal refund reduced by $828.  Is that correct way to see the 'income' from the refund?

There will be no other estate income for 2024.

So... I will need to (purchase Turbotax Business and State again next year... $$$) and file estate taxes again for 2024, to account for $828 of 2024 estate income?  Am I understanding correctly?

Are there any legal/appropriate options (I can incorporate into this year's returns) to avoid that?

Even though I don't want to... would it be appropriate to somehow move that $828 of estate income to my personal return for 2024 (since it'll be the only income for the estate in 2024) to avoid the hassle? If so, how?

How would that $828 be accounted for/tracked, to count as income in 2024... so I don't mess up?  Is it easily possible to track, as the effect was on Mom's last 1040 but would be somehow have to be captured on the Estate 1041?

Yikes!!

Thank you again!!

[ThomasM125 · Accepted solution]

Since the $3,600 of state tax deduction reduces your federal taxes, that is the amount that would be taxable in 2024, assuming the refund was not reduced to $0. In other words, you need to know how much state tax was used to reduce your taxes in 2023. If you had a refund of more than $828 in this case before you entered the $3,600 of state tax deduction, then all of the state tax was used to reduce your tax in 2023, so it would all be taxable in 2024. So your taxable income in 2024 would be $3,600, the amount you deducted from income in 2023.

When you file the 2023 tax return you could take the standard deduction and that would eliminate the state tax refund issue in 2024. You could also reduce your state tax deduction by $3,600 and still itemize. Then your state refund would not be taxable in 2024, since you didn't deduct it in 2023. I don't know of any other way around filing the estate tax return in 2024, as the refund will make the income over $600.