When a person dies, everything he owns is included in his gross estate. For federal tax purposes, the entirety of the gross estate is not taxed. The executor is permitted to make deductions from the gross estate, decreasing the eventual estate tax obligation. An important set of deductions are expenses related to the estate. It is important to note that only estates valued over $5.12 million are required to pay federal tax. Consider consulting with a licensed attorney or certified public accountant if you are an executor and required to prepare an estate tax return.
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Expenses associated with the decedent’s funeral are deducted from the gross estate. The cost of transporting the body to where it is interred is deductible as a funeral expense. The purchase of a tombstone or monument for the deceased is also deductible so long as the cost is reasonable and permitted by local law. The estate must actually pay for the funeral before the expenses can be deducted.
Any debts the decedent owed when he died are generally deductible for estate tax purposes. The debt is deductible if the estate pays the full amount. Generally, all of the debts the estate will owe are established during the probate process. The probate process varies by state, but generally the executor is required to contact all individuals and businesses the decedent owed money to and request they present documentation detailing the decedent’s debts. The executor is also generally required to publish a notice in a local newspaper notifying the public of the decedent’s death. This notice should also invite potential creditors to come forward if the decedent owed them money.
Only those expenses that are necessary to administer the estate are deductible for federal tax purposes. The costs must be tied to the executor’s attempts to collect the decedent’s assets, pay off his debts and distribute his property to his heirs. Administration expenses include any reasonable commission paid to the executor and attorney’s fees. Any expense incurred for the benefit of an individual heir or beneficiary that is not absolutely necessary for settling the estate as a whole is not deductible. An example of such an expense might be paying for an heir to come in from out of town so she could collect her share of the estate.
State Death Tax Deduction
Any state estate or inheritance tax paid by the estate is deductible for federal tax purposes. Unlike an estate tax, an inheritance tax is imposed on people who receive property for a decedent’s estate. Sixteen states have an estate tax while another six have an inheritance tax.
References & Resources
- Internal Revenue Service: Publication 950
- Legal Information Institute: U.S. Tax Code Section 2053 – Expenses, Indebtedness, and Taxes
- National Archives and Records Administration: Title 26 – Part 20 – Estate Tax; Estates of Decedents Dying After August 16, 1954
- Houston Bar Association: Probate, Trusts and Estates Section
- SmartMoney: Estate Taxes: The Worst Places to Die