21.1 Final Individual Income Tax Return (Form 1040) & Income in Respect of a Decedent (IRD §691)

Statutory Framework of the Final Form 1040

When an individual dies, their existence as an independent tax-filing entity terminates on the date of death. Under Internal Revenue Code (IRC) §443(a)(2) and Treasury Regulation §1.443-1(a)(2), a final individual income tax return (Form 1040 or Form 1040-SR) must be prepared and filed on behalf of the deceased taxpayer. This return covers a short tax year beginning on January 1 of the year of death and ending on the exact date of death.

Tax Reporting Timeline for a Deceased Taxpayer:
┌──────────────────────────────────────┬─────────────────────────────────────┐
│ Final Form 1040 (Individual Return)  │ Form 1041 (Fiduciary Return) / K-1  │
│ Period: Jan 1 through Date of Death  │ Period: Day after Death onward       │
│ Income/deductions received/paid      │ Income generated by estate assets   │
│ prior to death under cash method     │ or distributed to beneficiaries     │
└──────────────────────────────────────┴─────────────────────────────────────┘

Filing Requirements and Thresholds

The gross income filing requirements for a decedent's final return are identical to those for living individuals under IRC §6012. Crucially for the Special Enrollment Examination (SEE), filing thresholds and the standard deduction are NOT prorated for the short tax period. For example, if an unmarried calendar-year taxpayer dies on March 14, 2025, the full 2025 Single standard deduction ($15,750 post-OBBBA) and full filing threshold apply. If the decedent turned 65 on or before their date of death (or would have reached age 65 the day following death), they qualify for the full additional standard deduction for age ($2,000 for Single/HoH or $1,600 for MFJ/MFS).

Procedural Heading and Due Date Requirements

• Header Notation: The tax preparer must write the word "DECEASED", the decedent's full legal name, and the date of death across the top of Form 1040 (e.g., "DECEASED — Robert A. Vance — May 18, 2025").
• Name and Address Area: If a personal representative has been appointed, enter the decedent's name and Social Security number, followed by the personal representative's name and mailing address. If a surviving spouse is filing a joint return, enter both names and SSNs, using the surviving spouse's address.
• Filing Due Date: The final return is due on the normal statutory deadline: April 15 of the year following the year of death. The death of the taxpayer does not accelerate the filing deadline. If additional time is required, an automatic 6-month extension to October 15 can be secured by filing Form 4868 by April 15.

Signature Authority & Spousal Filing Options

Determining who possesses legal authority to sign the decedent's final Form 1040 depends on whether a fiduciary has been appointed by a probate court and the decedent's marital status at death.

Surviving Spouse Joint Return Rules & The Remarriage Disqualification

Under IRC §6013(a)(2), a joint return may be filed for a deceased spouse and surviving spouse if the decedent died during the tax year, provided the surviving spouse did not remarry before the close of that tax year. The joint return combines the surviving spouse's income and deductions for their entire 12-month calendar year with the deceased spouse's income and deductions earned up to the date of death.

[!WARNING] The Remarriage Cliff: If the surviving spouse remarries on or before December 31 of the year in which the spouse died, the surviving spouse CANNOT file a joint return with the deceased spouse. The surviving spouse must file either as Married Filing Jointly (MFJ) or Married Filing Separately (MFS) with the new spouse. The deceased spouse's final return must then be filed using the Married Filing Separately (MFS) status.

Personal Representative Disaffirmance Rule

If the surviving spouse files a joint return before a personal representative is appointed, and a representative is subsequently appointed by the probate court, IRC §6013(a)(3) grants the representative the statutory right to disaffirm the joint return. To disaffirm, the representative must file a separate return (MFS) for the decedent within one year after the due date (including extensions) of the joint return. Upon disaffirmance, the surviving spouse's previously filed joint return is automatically converted into an MFS return.

Form 1310: Claiming a Refund Due a Deceased Taxpayer

When a deceased taxpayer's final Form 1040 reflects an overpayment of tax, the IRS will not issue a refund check to just anyone. Under Treasury rules, Form 1310 (Statement of Person Claiming Refund Due a Deceased Taxpayer) must be submitted to establish entitlement to the overpayment.

Form 1310 Part I Checkbox Categories:
├── Box A: Surviving spouse requesting reissuance of a refund check payable to both
├── Box B: Court-appointed personal representative claiming refund
└── Box C: Other claimant (heir, relative) who certifies will pay according to law

When Form 1310 Is NOT Required (Crucial Exam Exceptions)

Enrolled Agent exam questions frequently test the two specific exceptions where Form 1310 is NOT required:

1. Surviving Spouse Filing Joint Return: A surviving spouse filing an original or amended joint Form 1040 with the decedent does not file Form 1310. The refund is issued directly in the joint names.
2. Court-Appointed Personal Representative (Original Return): A court-appointed personal representative filing an original Form 1040 for the decedent does not file Form 1310, provided they attach a certified copy of the court document showing their appointment (e.g., Letters Testamentary or Letters of Administration). If e-filing, the representative indicates appointment on the return and retains the letters in their records.

When Form 1310 IS Mandatory:

• A court-appointed personal representative filing an amended return (Form 1040-X) or claim for refund (Form 843) must attach Form 1310 along with the court appointment document.
• Any non-spouse claimant where no personal representative is appointed (Box C filers, such as adult children, siblings, or trustees) must complete and attach Form 1310 and, if filing on paper, attach a certified copy of the death certificate.

Post-Death Medical Expenses Election (IRC §213(c))

Under the general cash-method rule, deductions are allowed only in the year paid. When a taxpayer incurs substantial medical expenses prior to death, but those bills are paid by their estate after death, IRC §213(c) provides a powerful statutory tax election.

IRC §213(c) Election Requirements:
1. Medical expenses incurred by decedent during lifetime
2. Paid out of the decedent's estate within 1 YEAR after the date of death
3. Written waiver statement filed in duplicate waiving Form 706 estate tax deduction
4. Claimed on decedent's final Form 1040 (Schedule A) subject to 7.5% AGI floor

The Double-Deduction Prohibition and Waiver Statement

Under IRC §213(c)(2), medical expenses paid by the estate cannot be deducted for federal income tax purposes on Form 1040 and simultaneously deducted as an administration debt of the estate under IRC §2053 on the federal estate tax return (Form 706). To claim the deduction on the final Form 1040, the executor must file a statement in duplicate verifying that:

• The amount has not been claimed or allowed as an estate tax deduction under IRC §2053; and
• All rights to claim the deduction on Form 706 at any time are irrevocably waived.

The 7.5% AGI Floor and Rev. Rul. 77-357 Trap

Medical expenses deducted on Form 1040 Schedule A are deductible only to the extent they exceed 7.5% of the decedent's Adjusted Gross Income (AGI). Under Revenue Ruling 77-357, the disallowed portion—the initial 7.5% that falls below the income tax floor—cannot be transferred back and deducted on Form 706. By making the §213(c) election, the estate loses the tax benefit of that bottom 7.5% entirely.

Comprehensive Calculation Example: Harold died on June 1, 2025, with an AGI of $80,000 on his final return. He incurred $20,000 of hospital expenses before death. His estate paid the $20,000 medical bill on November 15, 2025 (within 5 months of death).

1. The estate makes the IRC §213(c) election and attaches the required waiver.
2. AGI limitation: $80,000 x 7.5% = $6,000 non-deductible floor.
3. Allowable Schedule A medical deduction: $20,000 - $6,000 = $14,000.
4. The remaining $6,000 cannot be deducted on Form 706 under Rev. Rul. 77-357.

Income in Respect of a Decedent (IRD under IRC §691)

One of the most heavily tested individual tax concepts on the EA exam is Income in Respect of a Decedent (IRD) governed by IRC §691. IRD refers to gross income amounts to which the decedent was entitled at the time of death, but which were not properly includible on the decedent's final Form 1040 prior to death under the decedent's accounting method.

Because the vast majority of individuals use the cash receipts and disbursements method, income earned but not yet actually or constructively received prior to death cannot be reported on their final Form 1040. Instead, it constitutes IRD.

Core Principles of IRD (IRC §691):
┌────────────────────────┬──────────────────────────────────────────────────┐
│ 1. Taxable Recipient   │ Taxed to whichever entity or person actually     │
│                        │ receives the income (Estate or Beneficiary)      │
├────────────────────────┼──────────────────────────────────────────────────┤
│ 2. Character Retention │ Retains identical tax character (ordinary,       │
│                        │ capital gain, tax-exempt) as in decedent's hands │
├────────────────────────┼──────────────────────────────────────────────────┤
│ 3. NO Basis Step-Up    │ Under IRC §1014(c), IRD items receive ZERO       │
│                        │ stepped-up basis to fair market value            │
├────────────────────────┼──────────────────────────────────────────────────┤
│ 4. §691(c) Deduction   │ Income recipient receives an itemized deduction  │
│                        │ on Schedule A for federal estate tax paid on IRD │
└────────────────────────┴──────────────────────────────────────────────────┘

Common IRD Items vs. Non-IRD Inherited Assets

The Complete Denial of Stepped-Up Basis (IRC §1014(c))

While capital assets like stock, land, and rental real estate receive a stepped-up basis to fair market value at the date of death under IRC §1014(a), IRC §1014(c) expressly denies a basis step-up to any item of IRD. If a taxpayer dies with a Traditional IRA worth $500,000, the beneficiary does not get a $500,000 basis. Every dollar distributed from the IRA is fully taxable ordinary income to the beneficiary, exactly as it would have been to the decedent.

Installment Notes Transferred at Death (IRC §691(a)(4))

When a decedent held an installment note from a prior sale of property reported under IRC §453, the death of the note holder does not trigger immediate recognition of the deferred gain. Instead, the installment obligations are treated as IRD. The person or estate that receives installment payments must report the same percentage of each payment as capital gain that would have been reported by the decedent had they lived.

• Cancellation or Transfer to Obligor: If the installment note is canceled at death, or transferred to the buyer/obligor under the decedent's will, the deferred gain is immediately triggered and recognized by the estate as gross income under IRC §691(a)(5).

The IRC §691(c) Estate Tax Deduction

Because IRD items are subject to both the federal estate tax (Form 706) in the gross estate and federal income tax (Form 1040/1041) when collected by the recipient, double taxation would occur. To alleviate this, IRC §691(c) allows the beneficiary who includes IRD in gross income to claim a miscellaneous itemized deduction on Schedule A (Form 1040), Line 16.

Crucial Exam Rules for the §691(c) Deduction:

1. Deduction Type: It is claimed as an itemized deduction on Schedule A. It is NOT an above-the-line adjustment to gross income.
2. Exemption from 2% Floor: It is specifically listed under IRC §67(b)(7) as an itemized deduction that is NOT subject to the 2% of AGI floor (which TCJA suspended and OBBBA suspended permanently). Thus, it remains 100% deductible for itemizing taxpayers.
3. Calculation: The deduction equals the incremental federal estate tax caused by including the net IRD item in the decedent's gross estate (estate tax with net IRD minus estate tax without net IRD).