The old saying that nothing is certain in life except “death and taxes” has stood the test of time from the day Ben Franklin first uttered it.
In retrospect, taxes probably deserve top billing in that truism since not even death stops the Internal Revenue Service from collecting them.
Debts are not directly passed on to heirs in the United States, but if there is any money in your parent’s estate, the IRS is the first one getting paid.
So, while beneficiaries don’t inherit unpaid tax bills, those bills, must be settled before any money is disbursed to beneficiaries from the estate.
Not only that, but the IRS is persistent. It can pursue estate tax liability for 10 years, according to the Collection Statute Expiration Date (CSED). In some cases that pursuit can go on even longer.
“Estate planning, estate taxes and income taxation are different categories,” said Mary Anne Ehlert, a certified financial planner and president at Protected Tomorrows. “And coordination of all of it is important (and should) be done carefully and by professionals who understand the implication of all the old law as well as the new laws.”
What Happens to Tax Debt After Someone Dies?
Any income in a calendar year earned by a deceased person until the date of their passing, must be claimed on their personal tax return. Any income earned after the date of their passing must be accounted for on the estate’s tax return for that calendar year.
In cases where there is a surviving spouse, that spouse must account for the deceased person’s income at their next joint filing.
Beneficiaries are not directly responsible for debts left by the deceased. One exception is in community property states where a surviving spouse could be responsible for portions of outstanding debt.
While federal student loans are forgiven upon a person’s death, it’s a mistake to think tax debt is, too. The executor of a will who does not file taxes for a deceased person risks bringing a federal lien against the estate and puts himself or herself in financial jeopardy.
Will I Have to Pay My Parents’ Tax Debt Off?
Technically, children won’t have to pay off their parent’s tax debt. But that doesn’t mean what you have coming in a will is entirely yours if the deceased owes money to the IRS.
“The money and property you inherit is subject to be used in settling the tax debt of the deceased,” said Derek Jacques, a general practice attorney at The Mitten Law Firm in Detroit. “So, if your parents owed taxes in the sum of $30,000, then the IRS could sue to have $30,000 taken out of whatever inheritance you receive.
“However, if your parents left you $10,000 in cash when they passed away, the IRS would seize the $10,000 and then the issue would be resolved. If they owed a large sum, the IRS could seize property like a house.”
What to Do If You Inherited Tax Debt from Your Parents
If you inherit tax debt from your parents, you should meet with a tax attorney to examine the will, or trust, if either is in place.
If the IRS, as a super creditor, isn’t first in line to collect money due, it’s probably second in line behind the funeral director.
“The executor (of the will) has personal responsibility to make sure everything is properly reported and distributed, and this includes the income taxes properly paid to the IRS,” Ehlert said.
The executor of the will should take certain steps if tax debt is outstanding:
- Determine who is responsible for the specific debt. If you’re not the executor, reviewing the will with the designated party is a good first step.
- Contact the IRS. “Often, assessing taxes early on in an estate can help answer an important question: should the heirs receive anything at all, knowing that a wrongful distribution from an insolvent estate will likely come with costs, interest, and ultimate liability,” said Ryan Sellers, founding partner at Hales and Sellers, PLLC, in Dallas.
- If the tax debt is significant and involves property you’re inheriting and would like to keep, ask the IRS about possible partial payment installment agreement. Or, if desperate times call for it, ask about an offer in compromise in which the IRS might agree to accept less than what is owed.
- Don’t assume state laws necessarily apply to federal law.
Jack Hales, a partner with Sellers, says that while Texas, for instance, offers generous protections in probate, there are limits.
“Federal law preempts our protections, and so the IRS does not have to jump through the same hoops and limitations as virtually every other creditor,” Hales said.
- If you are inheriting property – your childhood home for instance – check to see if the house is owned free and clear or has a home equity loan attached.
- Consult with a tax attorney. Make yourself aware of all possible tax pitfalls.
“There aren’t really any mechanisms for avoiding IRS tax liability due from an estate (that arose during the deceased person’s life),” Sellers said. “Trusts don’t solve this problem either.”
Tax Debt Relief Options
Trying to avoid tax liability is something worth pursuing while you’re alive (legally of course.) When inheriting tax debt, though, avoidance isn’t a strategy.
Tax debt can sometimes accumulate during a person’s life because he or she is struggling to pay off other debt. If you’re carrying tax debt and wish to clear it so it doesn’t end up as an estate liability that affects what you leave your beneficiaries, consider pursuing some tax debt relief options.
- IRS payment plans and debt forgiveness. IRS payment programs are somewhat friendlier than they once were. If you meet tax relief standards, of course. As mentioned, an offer-in-compromise wherein the IRS agrees to settle a taxpayer’s liability for less than the full amount owed is likely a longshot but might be worth exploring in special circumstances.
- Debt consolidation. Debt consolidation is a way to roll multiple debts into a single payment that can organize your debt, often at a reduced interest rate and lower monthly payment. The savings carries the additional benefit of helping people get through an unexpected emergency or rainy day financially (like that property tax bill that soared after the latest county appraisal.)
- Settling your tax debt with the IRS. The IRS offers avenues for settling your tax debt that go beyond installment plans but, depending on the size of that debt, you should consider hiring a tax attorney with experience working with the IRS. Just know that if you enter into an agreement, whether it’s an installment plan or an agreement to consider your tax debt “currently not collectible” – a pause, if you will – the IRS has little patience if you stray from the agreement terms.
- There could be some allowances made for tax debt in a Chapter 7 bankruptcy filing versus a Chapter 13 bankruptcy filing, but, in general, tax debt is not discharged through bankruptcy. Pursuing tax forgiveness through bankruptcy is useful if you can prove the taxes resulted from fraud. Beyond that, don’t count on forgiveness. It’s best to seek counsel from an experienced tax attorney when exploring your options and keep in mind filing bankruptcy affects your credit rating for years to come.
- Taking out a loan to pay off tax debt might make financial sense in certain situations, depending on the loan terms and the amount of taxes owed. Just know that when pursuing tax debt relief, be on the lookout for loan scams, usually aimed at the very young and old. Loan scams run the gamut from the use of fake corporate logos to gain trust, to companies charging exorbitant interest or hidden fees. Take extra time to make sure the loan company you deal with, is legitimate.
Additional Debt Relief Options
Debt can sabotage you in any number of ways, even compromising your ability to stay current on tax payments.
In the case of inherited debt – either as co-signer on a deceased parent’s accounts or in the form of a tax lien against an estate – it can also greatly reduce inheritance.
If you find yourself in debt or you inherit debt, there are debt relief options available.
Just remember, you’re not alone. By a long shot. There are a lot of smart people who end up in debt. The smartest of them take advantage of their options and are open to seeking help from professionals. Here are some debt-relief options to explore:
- Credit counseling: Addresses the root causes of debt and can help people develop a budget, manage their money, and learn how to approach creditors about settlements or payment plans.
- Debt Settlement: Is an agreement in which a lender agrees to accept a lump sum payment, often at significantly less than what is owed. It’s especially helpful for borrowers carrying an unwieldy balance on high interest credit cards.
- Debt Management: Debt management plans offered by nonprofit credit counseling agencies provide a structured strategy to paying down debt. They reduce the interest rate on credit cards to approximately 8% – often less than half what borrowers are carrying on high-interest cards – and make monthly payments affordable so consumers can pay off debt in 3-5 years.
Debt can be debilitating at any time. Often in tandem with high interest credit card rates, it’s the opposite of the gift that keeps on giving – a snowball that can roll on even after you’re gone.
Avoiding debt isn’t always possible. Getting help from a professional is a smart way to manage debt now and provide for your loved ones later.
About The Author
Robert Shaw writes about finding ways to solve financial problems like keeping up with mortgage payments, paying off credit card debt and avoiding bankruptcy for Debt.org. During his 45-year career in journalism, Robert was a columnist for the Cleveland Plain Dealer before transitioning to television sports commentary at WKYC.
- Napoletano, E. (2022, November 28) Estate Planning Basics. Retrieved from https://www.forbes.com/advisor/retirement/estate-planning/
- Hicks, P. (ND) Who is Responsible for a Deceased Unpaid Tax? Retrieved from https://trustandwill.com/learn/what-happens-if-a-deceased-person-owes-taxes
- Zinn, D. (2022, August 16) Tax debt relief: How to resolve your debt with the IRS. Retrieved from: https://www.bankrate.com/personal-finance/debt/tax-debt-relief/
- Desmarais, D. (2021, February 15) Am I Responsible for a Deceased Loved One’s Unpaid Tax Bills? Retrieved from https://kahnlitwin.com/blogs/tax-blog/am-i-responsible-for-a-deceased-loved-ones-unpaid-tax-bills