Forgiveness of Decedent's Tax Liability(p19)

Tax liability can be forgiven, or if already paid, refunded, if a member of the U.S. Armed Forces dies:

• While in active service in a combat zone,
• From wounds, disease, or other injury received in a combat zone, or
• From wounds or injury incurred in a terrorist or military action.

Tax for the year of death and possibly for earlier years can be forgiven.

In addition, any unpaid tax liability at the date of death may be forgiven. Any tax liability that is forgiven does not have to be paid.

If a member of the Armed Forces dies, a surviving spouse or personal representative handles duties such as filing any tax returns and claims for refund of withheld or estimated tax. A personal representative can be an executor, administrator, or anyone who is in charge of the decedent's assets.

Only the decedent's part of the joint income tax liability is eligible for the refund or tax forgiveness. To determine the decedent's part, the person filing the claim must:

1. Figure the income tax for which the decedent would have been liable if a separate return had been filed,
2. Figure the income tax for which the spouse would have been liable if a separate return had been filed, and
3. Multiply the joint tax liability by a fraction. The top number of the fraction is the amount in (1), above. The bottom number of the fraction is the total of (1) and (2).

The amount in (3) is the decedent's tax liability that is eligible for the refund or tax forgiveness. If you are unable to complete this process, you should attach a statement of all income and deductions, indicating the part that belongs to each spouse. The IRS will determine the amount eligible for forgiveness.

If the decedent's legal residence was in a community property state and the spouse reported half the military pay on a separate return, the spouse can get a refund of taxes paid on his or her share of the pay for the years involved. The forgiveness of unpaid tax on the military pay also would apply to the half owed by the spouse for the years involved.

Tax liability is forgiven for an individual who:

• Is a member of the U.S. Armed Forces at death, and
• Dies while in active service in a combat zone, or at any place from wounds, disease, or injury incurred while in active service in a combat zone.

The forgiveness applies to:

• The tax year death occurred, and
• Any earlier tax year ending on or after the first day the member served in a combat zone in active service.

In addition, any unpaid taxes for years ending before the member began service in a combat zone will be forgiven and any of those taxes that are paid after the date of death will be refunded.

The beneficiary or trustee of the estate of a deceased service member does not have to pay tax on any amount received that would have been included (had the service member not died) in the deceased member's gross income for the year of death.

These rules also apply to a member of the Armed Forces serving outside the combat zone if the service:

• Was in direct support of military operations in the zone, and
• Qualified the member for special military pay for duty subject to hostile fire or imminent danger.

For a description of combat zone, see Combat Zone, earlier, under Combat Zone Exclusion.

The date of death for a member of the Armed Forces who was in a missing status (missing in action or prisoner of war) is the date his or her name is removed from missing status for military pay purposes. This is true even if death actually occurred earlier.

Tax liability is forgiven for an individual who:

• Is a member of the U.S. Armed Forces at death, and
• Dies from wounds or injury incurred while a member of the U.S. Armed Forces in a terrorist or military action.

The forgiveness applies to:

• The tax year death occurred, and
• Any earlier tax year in the period beginning with the year before the year in which the wounds or injury occurred.

A terrorist or military action is any terrorist activity primarily directed against the United States or its allies or any military action involving the U.S. Armed Forces and resulting from violence or aggression against the United States or its allies.

Any multinational force in which the United States participates is considered an ally of the United States.

The beneficiary or trustee of the estate of a deceased service member does not have to pay tax on any amount received that would have been included (had the service member not died) in the deceased member's gross income for the year of death.

Army Private John Kane died in 2008 of wounds incurred in a terrorist attack in 2007. His income tax liability is forgiven for all tax years from 2006 through 2008.

Returns reflecting forgiven tax and claims for refund of forgiven tax that has already been paid must be identified. Usually, Form 1040X is used to claim the refund.

If the decedent's tax liability is forgiven, the personal representative should take the following steps.

• File Form 1040 if a tax return has not been filed for the tax year. Form W-2 must accompany the return.
• File Form 1040X if a tax return has been filed. A separate Form 1040X must be filed for each year in question.
• Properly identify the return as explained next.

All returns and claims must be identified by writing "Enduring Freedom—KIA," "Kosovo Operation—KIA," "Desert Storm—KIA," or "Former Yugoslavia—KIA" in bold letters on the top of page 1 of the return or claim. On Forms 1040 and 1040X, the phrase "Enduring Freedom—KIA," "Kosovo Operation—KIA," "Desert Storm—KIA," or "Former Yugoslavia—KIA" must be written on the line for total tax. If the individual was killed in a terrorist action, write "KITA" on the front of the return and on the line for total tax.

An attachment that includes a computation of the decedent's tax liability before any amount is forgiven and the amount that is to be forgiven should accompany any return or claim. For joint returns, see Joint returns, earlier.

The following documents must accompany all returns and claims for refund.

• Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, and
• A certification from the Department of Defense or the Department of State.

For military and civilian employees of the Department of Defense, certification must be made by the Department on Form DoD 1300, Report Of Casualty. For civilian employees of all other agencies, certification must be a letter signed by the Director General of the Foreign Service, Department of State, or his or her delegate. The certification must include the deceased individual's name and social security number, the date of injury, the date of death, and a statement that the individual died as the result of a terrorist or military action. If the individual died as a result of a terrorist or military action outside the United States, the statement also must include the fact that the individual was a U.S. employee at the date of injury and at the date of death.

If the certification has been received but there is not enough tax information to file a timely claim for refund, file Form 1040X with Form 1310. Include a statement saying that an amended claim will be filed as soon as the necessary tax information is available.

If the tax-forgiveness rules apply to a prior year's tax that has been paid and the period for filing a refund claim has not ended, the tax will be refunded. If any tax is still due, it will be canceled. Generally, the period for filing a refund claim is 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. Returns filed before they are due are considered filed on the due date, usually April 15.

If death occurred in a combat zone or from wounds, disease, or injury incurred in a combat zone, the deadline for filing a claim for credit or refund is extended using the rules discussed later under Extension of Deadlines.

These returns and claims must be filed at one of the following addresses.

If you use the U.S. Postal Service, file these returns and claims at the following address.

Internal Revenue Service 
P.O. Box 4053 
Woburn, MA 01888

Private delivery services cannot deliver items to P.O. boxes. If you use a private delivery service, file these returns and claims at the following address.

Internal Revenue Service 
Stop 661 
Andover, MA 05501

Designated private delivery services include only the following.

• DHL Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day Service.
• Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
• United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.