Family
When a loved one dies: final returns and inherited IRAs
What has to be filed, when, and the few decisions that are expensive to get wrong. The tax side is more orderly than it looks, and nothing has to happen the week of the funeral.
Losing someone is hard enough without the paperwork. The tax side is more orderly than it looks: one more return for the person, sometimes a return for the estate, and a few rules about what the people left behind inherit. Nothing has to happen the week of the funeral. Two decisions, though, are expensive to get wrong, and both are easiest in the first few months: getting date-of-death values, and what to do with an inherited IRA.
The final return
One more Form 1040 covers January 1 through the date of death, due April 15 of the following year. It is prepared like any other year, with “deceased” and the date of death at the top, and the full standard deduction is allowed even if the person died in January. A surviving spouse can file jointly for that year and sign for both; otherwise the court-appointed representative or the person handling the affairs signs. Two small forms go with it when they apply: Form 1310 lets someone other than a spouse or court-appointed representative receive a refund due to the person who died; Form 56 tells the IRS who the fiduciary is, so notices come to the right address instead of to a house that is being sold.
The estate’s return. If the estate earns $600 or more of income while it is being settled, interest, dividends, rent or a gain on something sold, it files its own return, Form 1041, under its own tax ID number. Income it passes to heirs is taxed to them on a Schedule K-1; income it keeps is taxed to the estate. A living trust that becomes irrevocable at death files the same form. Assets that pass by beneficiary designation or joint title, such as IRAs, life insurance and a jointly owned home, never touch it.
The estate tax is a different tax entirely, on the value of what the person owned. With a $15,000,000 exemption per person for 2026, indexed from here on, very few estates owe it. A surviving spouse can elect to carry over the unused exemption on Form 706, worth doing even when no tax is due. Colorado has no estate or inheritance tax at all.
Inherited property steps up
The most valuable rule in this area, and the one most often overlooked. Property you inherit takes a new cost basis equal to its value on the date of death. A house bought decades ago has today’s value as its basis in the heirs’ hands; sold soon after, there is little or no gain. The same is true of stock, mutual funds and land. For married couples, half of jointly owned property steps up when the first spouse dies; Colorado is not a community-property state, so the other half keeps its original basis. Retirement accounts do not step up; every dollar in a traditional IRA or 401(k) was never taxed, and it is taxed to whoever takes it out. Get a date-of-death value for every account and property now, while the brokerage can print it and an appraiser can see the house as it was.
Worked example: what the heirs actually owe
A widower dies in March 2026 leaving three things to his daughter: the house, a brokerage account, and a traditional IRA.
| Asset | He paid | Value at death | Daughter’s basis | Tax when she sells or withdraws |
|---|---|---|---|---|
| House | $110,000 (1989) | $640,000 | $640,000 | Sold in August for $650,000: $10,000 gain, about $1,940 of tax. The $530,000 of lifetime appreciation is never taxed. |
| Brokerage account | $80,000 | $310,000 | $310,000 | Sold the same week: no gain, no tax |
| Traditional IRA | — | $420,000 | None; no step-up | Every dollar taxed as she withdraws it, within ten years: $420,000 of ordinary income to place |
Had he given her the house during his life, her basis would have been his $110,000 and the sale would have cost about $105,000 in federal and Colorado tax. The IRA is the opposite: it is the one asset where timing the withdrawals, below, is the whole game.
Inherited IRAs
This is where people make expensive mistakes, usually by doing nothing, or by cashing out.
| Beneficiary | The rule |
|---|---|
| Surviving spouse | May treat the IRA as their own, or keep it as an inherited IRA with no early-withdrawal penalty. Treating it as their own is usual; a younger spouse who needs the money before 59½ may prefer the inherited account. |
| Most other people: adult children, siblings, friends | Must empty the account by the end of the tenth year after the death. If the owner had already reached RMD age, annual distributions are also required in years one through nine, enforced from 2025. Missing one brings a penalty. |
| The owner’s minor child | Takes annual distributions over their own life expectancy until 21, then the 10-year clock starts. |
| Disabled or chronically ill beneficiary; anyone not more than 10 years younger than the owner | May stretch distributions over their own life expectancy. |
| An estate, a charity, or a trust that does not qualify | Shorter deadlines: five years if the owner died before required distributions began, otherwise payouts over the owner’s remaining life expectancy. Naming the estate is the most common mistake on a beneficiary form. |
Inherited Roth IRAs follow the same timing rules, but the withdrawals are tax-free, so the usual plan is to wait until year ten and let them grow. If the owner died before taking that year’s RMD, it still has to come out, to the beneficiary, by December 31.
The planning question for a non-spouse heir is when. A large IRA taken all in year ten lands on top of that year’s income and can push a working heir from the 22% bracket into 24% or beyond. Spread over the ten years, heavier in a year the heir is between jobs or newly retired, it can cost far less. Do not roll an inherited IRA into your own unless you are the spouse; that cannot be undone, and it is treated as a full taxable distribution.
Worked example: the daughter’s $420,000 IRA, three ways
She is 52, married, with $160,000 of household income, in the 22% bracket that ends at $211,400 joint.
| Cash it out in year one | Wait and take it all in year ten | $42,000 a year for ten years | |
|---|---|---|---|
| Income added in the big year | $420,000 | $420,000 plus ten years of growth | $42,000 |
| Brackets the IRA money lands in | 22%, 24%, 32%, 35% | Same, on a larger sum | 22% each year, within the bracket |
| Federal tax on the IRA money, roughly | about $112,000 | more, on more | about $92,000 over ten years |
| Colorado at 4.40% | $18,500 | more | $18,500, less if she is 55+ for some years (subtraction) |
| Difference versus cashing out | — | worse | about $19,000 saved, plus growth on the money left in, and more if any year lands in the 12% bracket |
Rounded; assumes the annual RMD rule applies and is met by the $42,000. If she plans to retire at 58, the years after retirement are the ones to load up, when her own income drops to the 12% bracket. Laying the ten years out on one page beside her expected income is the whole exercise.
The surviving spouse’s filing status
The year of death: file jointly, with the full $32,200 standard deduction and joint brackets. If the person who died was 65 or older, the $1,650 age add-on and the $6,000 senior deduction still apply for that year. The next two years: a survivor with a dependent child at home may file as a qualifying surviving spouse, keeping the joint deduction and brackets. Without a dependent child, this step is skipped. After that: single, with a $16,100 standard deduction and brackets half as wide. The same pension and IRA income is taxed at higher rates, more Social Security becomes taxable, and Medicare premiums can rise. That is the widow’s penalty, and the time to plan for it is while both spouses are alive.
Behind the scenes
Income that arrives after the date of death does not go on the final return, even if it was earned before. The last paycheck, the dividend paid a week late, the IRA not yet distributed: these are “income in respect of a decedent” and belong to whoever receives them, the estate or the heir. A preparer goes through every 1099 with the date of death beside it and splits the year in two. A 1099 for the full year in the deceased’s name is normal; what matters is where each dollar lands. The second check is the beneficiary forms, because an IRA that names “my estate,” or names a spouse who died first, follows the worst set of rules in the table above.
The Colorado side
Colorado keeps this simple. No estate or inheritance tax; nothing is owed to the state on what you inherit. A final Colorado return accompanies the final federal one, with the same filing status and dates, and the estate files a Colorado fiduciary return if it files a federal Form 1041. Inherited IRA withdrawals are taxed at 4.40% like any other IRA income, and an heir 55 or older can use the Colorado pension subtraction against them; an heir under 55 can subtract up to $20,000 of a survivor benefit paid directly because of the death (code 4 on the 1099-R). The stepped-up basis flows through to Colorado since the state starts from federal taxable income.
What to bring your preparer, when you are ready
- Several certified copies of the death certificate
- The last tax return filed
- Letters of appointment from the court, or the trust document
- Every 1099, W-2 and 1098 that arrives in the deceased’s name; they keep arriving through February
- Account statements for the month of death, and the beneficiary designation on each retirement account
- A date-of-death value for real estate: an appraisal or a realtor’s written opinion
- Medical bills paid in the last year and funeral expenses
- Any IRS or Colorado letters, unanswered
Questions people ask
Do I have to file a return for my mother? She only had Social Security.
Often not; the usual filing thresholds apply. If tax was withheld from anything, filing gets it refunded, with Form 1310 so the check can be issued to you.
I inherited money from my father. Is it taxable to me?
Cash, a house, stock and life insurance are not income to you. A traditional IRA or 401(k) is, as you withdraw it. Income earned after the death on what you inherited is yours to report.
The IRA custodian sent me a form to open an inherited IRA. Can I just cash it out?
You can, and all of it will be taxed in one year. Opening the inherited IRA first keeps every option open. Do not roll it into your own IRA unless you are the spouse; that cannot be undone.
My husband died in March. Do I file jointly?
Yes, unless you remarry before December 31. For the next two years you may qualify as a surviving spouse if a dependent child lives with you; otherwise you file single.
Can the estate deduct the funeral?
Not on an income tax return. Funeral costs are deductible only on an estate tax return, Form 706, which almost no estate files. Medical bills paid within a year after death can be deducted on the final 1040 instead.
Two things to do early; everything else can wait
Get a date-of-death value for every account and property, and open the inherited IRA as an inherited IRA rather than cashing it out or rolling it into your own. Both are easy now and hard later. The rest is paperwork at whatever pace you need.
Forms and official pages named in this article
- Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer
- Form 56, Notice Concerning Fiduciary Relationship
- Form 1041, U.S. Income Tax Return for Estates and Trusts
- IRS Publication 559, Survivors, Executors and Administrators
- IRS Publication 590-B, Distributions from IRAs (inherited IRA rules)