Tax Considerations When Handling
Someone Else's Estate- Part 1

Losing a loved one is one of the most painful experiences we go through. The emotional toll can be overwhelming, and that sense only increases when you are responsible for settling the person's financial affairs. In this first article of a two-part series, we help you to identify some of the tax issues that arise when a person passes away.

What Is Your Role?

When a loved one passes away, someone must handle the resulting financial fallout, including the tax issues. 

That person may be identified in the “decedent’s” (deceased individual’s) will as the executor of the decedent’s estate. 

If there is no will, the probate court will appoint an administrator. In either case, it’s often the surviving spouse or another family member who takes on the responsibility. In this article, we will refer to that person as the “executor.” 

If that's you, your role as the executor is to identify the estate’s assets, pay off its debts, and distribute the remainder to the rightful heirs and beneficiaries. 

You are also responsible for filing any necessary tax returns and arranging to pay any taxes. 

Choose Tax Treatment for Decedent’s Medical Expenses

Pay extra attention to the decedent’s medical expenses. 

If uninsured expenses were incurred but not paid before death, you (as the executor) must make a potentially important choice about how those expenses are treated for federal tax purposes. 

Along with any medical expenses that have already been paid in the year of death, the executor (you) can choose to deduct as-yet-unpaid medical expenses on the decedent’s final Form 1040, to the extent the combined paid and unpaid expenses exceed 7.5 percent of adjusted gross income (AGI)—assuming the decedent’s final Form 1040 itemizes deductions.

To take advantage of this special itemized deduction privilege for unpaid medical expenses, you must pay the expenses out of the decedent’s estate during the one-year period beginning with the day after the date of the decedent’s death.

Under this special rule:

  • you avoid the cash-basis taxpayer rule, which requires you to pay the expense before you can deduct it; and 
  • you will likely have more than a year of expenses compared with what you would have had on a cash basis, making it more likely that you can exceed the 7.5 percent floor. 

Alternatively, in the relatively unlikely event that the estate is subject to the federal estate tax, you (as the executor) can choose to deduct unpaid medical expenses on the decedent’s federal estate tax return rather than on the decedent’s final Form 1040. 

But when no federal estate tax is owed, this is not an option.

Planning Point

When federal estate tax is owed, deducting unpaid medical expenses on the federal estate tax return is usually the tax-smart option. 

That’s because the federal estate tax rate is 40 percent whereas the decedent’s final federal income tax rate could be as low as 10 percent. 

Also, you can deduct the full amount of unpaid medical expenses on the estate tax return, not just the excess over the 7.5 percent of AGI threshold.

Check back soon for the second article of the series, which will explain other tax filing obligations that may apply.

We understand that taxes may be the last thing you want to deal with, but we are here to help you navigate the tax side of your loss.

Would you like to discuss the settling of an estate, or some other tax topic? Click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.


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