What Happens When You Die & Owe Taxes?

Your heirs aren't usually responsible for your unpaid taxes.

Your heirs aren't usually responsible for your unpaid taxes.

Even in death, you have to pay the taxman. When you die, any cash and assets that don't go to a named beneficiary -- such as life insurance policies or payable-on-death accounts -- become part of your estate. Before your family can inherit, your executor has to use the the estate assets to pay any remaining taxes you owe.

Income Tax

If you die this year and you owe income taxes, your executor has to file a final 1040 on your behalf. Even if you don't owe, your executor should file if you've had taxes withheld, so that she can add the refund to your estate. If your estate makes money after your death -- from a rental property or royalties, for instance -- your executor has to file a 1041 for the estate's income taxes too. The income goes to the estate until the assets are distributed to your heirs.

Other Taxes

If you own land and die owing property taxes, your executor takes care of that too. With a large estate, your executor may have to pay state or federal estate tax: the federal tax kicks in at $5.12 million as of 2012, but the government changes the exact amount fairly often. The various tax debts get priority over most of your other creditors. If it's a choice between paying a debt to your father and paying the IRS, the IRS wins.

Unpaid Tax

If you don't leave enough cash to pay your tax debts, your executor has to liquidate your other assets, such as real estate or stocks, to pay the bills. When the estate isn't worth enough to pay off the entire tax bill, the tax collector has to settle for partial payment. Your heirs aren't usually liable for any of your unpaid debts. Unfortunately, though, if taxes wipe out the estate, there's nothing left to leave your heirs.

Innocent Spouse

If you file joint returns and you've underpaid or cheated the IRS in the past, the agency can come after your spouse to collect the back taxes. A joint return makes each spouse liable for the full tax debt. Your spouse may be able to avoid paying by claiming innocent-spouse relief. To do this, he has to show the IRS that the mistake was 100 percent yours, and that he had no reasonable way to know there was a problem.

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About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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