Do I Need to Pay Income Taxes After I’m Dead?
Yes, you have to pay income taxes after you die.
However, there is a distinction between income from labor and income from accumulated assets, which we will refer to as “stuff.” Income from labor stops when you pass away, but income from your stuff continues to generate taxable income both during and after your lifetime.
Estate and Trust Definitions
When someone dies, their assets go into an estate. If you have a will or no will, your assets generate income that is still taxable. If you have a will, you will have to go through a legal procedure called probate to change the title on the assets so your beneficiaries can ultimately get them. When income generated from your stuff is over $600 in any year, you will have to report taxable income on an IRS Form 1041 fiduciary income tax return (California FTB Form 541) and pay taxes on that.
Revocable and Irrevocable Trusts
If you have a revocable and changeable trust, income generated from your stuff is taxed on your personal income tax return and not on any separate tax returns while you are alive. If you die and have a revocable living trust, it normally becomes irrevocable and non-changeable at that point, generating income that will be taxable. When the income generated from your stuff exceeds $600 per year, you will have to pay tax on it.
Transfer Liability
The executor or trustee is responsible for paying income taxes first before paying other bills. Failure to pay the income tax first can make the executor or administrator personally liable for that income tax. Additionally, if the executor or trustee pays out all the income to beneficiaries without paying the income tax, the IRS can go after the beneficiaries and tax their assets to pay the income tax.
Income Generating Assets
Income generated from pensions, IRAs, and annuities is not taxable during your lifetime, but it is taxable when you take the money out. When you die, these assets still generate income within the account, and it is not taxable before or after death. However, if the beneficiary takes the money out, it becomes taxable income.
