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My sister passed away with no heirs and I was her proxy for her disability claim and was given back pay for her disability. Any idea of a tax penalty?

Forum|Forum|3 years ago
November 17, 2022
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Best answer by Anonymous_

It sounds like it was not a “death benefit“, it was disability payments that were owed to her during her lifetime for being disabled and unable to work. However, the first thing you need to do is to clarify exactly what the payment was.

Then second, if it was a disability payment, you need to determine whether it was taxable or not. Some types of disability are taxable in some types of disability are not taxable, and some types of disability payments are only taxable if they are more than a certain amount.

Then third, if the money was paid to your sisters account in 2022, and if it was taxable, then your sister‘s estate needs to file an estate tax return for 2022. The return will calculate the taxes that are owed on the payment. Depending on the amount, there might actually be no taxes owed even if the income is considered taxable income, but you have to prepare the return to find out. If any taxes are owed, that will have to be collected from the three heirs who received a lump sum payment (which they should not have received until the taxes were taken care of.) If you want to file the estate tax return using TurboTax, you have to use TurboTax Business, which is a separate program from home & business. The business version is only available as a CD or download to install on a PC, and there is no Mac or online version.

@Opus 17 wrote:
Then third, if the money was paid to your sisters account in 2022, and if it was taxable, then your sister‘s estate needs to file an estate tax return for 2022.

@tjh1215 stated that the money was deposited into his (I presume) personal account. This is income in respect of a decedent and, if taxable, would be reported by @tjh1215 on @tjh1215's individual income tax return (1040) since the money was received by @tjh1215, not his sister's estate.

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Anonymous_

Employee

Is this IRD? Not clear. @Critter-3 ?

O

Opus 17

Employee

So first step, if you plan on filing her final tax return, you have to go to court and be appointed as her estate's representative or executor. The fact that you were her proxy doesn't carry over after death, and neither does a power of attorney. For a small estate, it's probably a simple form to file with the court.

Next point, you can't sell or distribute any of her assets until all her final bills are paid and that includes taxes. If she owes more than she can pay, no one else in the family is responsible, it just goes unpaid. But you can't distribute other assets until all the bills are paid.

To your question, it's not clear why there would be a penalty for back pay. Do you mean income tax?

There are three things I can think you might mean.

1. You might mean, she got a large lump sum payment and will owe income tax, how much is it? Unfortunately you need to actually file the return to find out, although you can make some estimates using this tool.

TaxCaster tax calculator

For most people, income taxes are 24% or less. It would have to be a truly enormous payout to be taxed at more than 24%.

2. Or, you might mean, since she got a lump sum of income and did not pay estimated taxes, she may owe a penalty on her tax return in addition to the income tax. The penalty plus interest is about 1% per month of the tax amount owed. For example, let's assume a $50K lump sum disability income payment made July 1, and she has no other income. The estimated tax would be due September 15, about $5000 for this example. If you don't make a payment until February 15 when you file the return, the penalty plus interest would be $50 per month for 5 months, or $250 total.

You can limit the penalty by making an estimated payment now instead of waiting to file the tax return, the sooner you make the payment, the less the penalty will be. If you make too large a payment, the extra will come back as a tax refund.

You also have the option to not include a penalty calculation when you file, and wait and see if the IRS sends a bill. If the IRS sends a bill for the penalty, you can apply for a one-time waiver if this is her first time owing a penalty, or you can apply for a waiver for cause (like, she was disabled and didn't know a penalty needed to be made and you as her representative made the payment as soon as you realized it was owed).

3. Or, by penalty you might mean that after her death, some part of the disability payment must be paid back to the insurer. We have no way of knowing anything about that.

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Anonymous_

Employee

In addition to other qualifications, anyone who is in actual or constructive possession of the decedent's property can file a final return for the decedent. A court appointment is not required.

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Opus 17

Employee

@Anonymous_

I had never heard that, although I suppose it makes sense because it would not be the first time that the IRS ignores state laws in order to collect their money. The IRS may not care who files the tax return as long as someone does it.

However, the taxpayer should still seek to be officially appointed as her sister‘s representative, because that makes it clear to all persons that there is one and only one person who is authorized to be the representative of the deceased persons estate, to pay taxes, distribute residual property, and otherwise handle any remaining affairs. I somewhat suspect this has already been done, but I made the notation for reference and for others who might read this in the future. I think it is also important to note that a power of attorney, while very useful during the life of a disabled or incapacitated person, ceases to exist and has no effect after the person dies, and some other form of authorization is needed to continue to handle the persons affairs.