I have a client who passed away last July but the vendor who issued her pension checks were not advised so she had all of her 2020 pension deposited into her bank account. Her accountant is trying to work out how to pay that back but it will be in the current year 2021. How do I handle filing her taxes if she received all of her payments in 2020 with taxes for both federal and state taken out but over five months of her 1099 will reflect payments after her passing? Has anyone else dealt with this?
The payments and withholdings for the seven months she was alive go on her final 1040. The five months of erroneous income go on the estate's 1041. The estate can use a fiscal year, and should try to get the money paid back by June. Add it in, then subtract it out. Even if it's not paid back yet, you can use accrual method. Attach explanations to both returns. Don't expect quick processing.